Government Contract Cost Accounting
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. This 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. 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:
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. This is especially true in cases 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. Our relevant experiences includes drafting policies, performing audit tests, developing and providing training, assisting with routine audit inquiries and helping clients prevail in complex negotiations and litigation.
Baker Tilly’s government contracting professionals approach each client’s circumstances with a fresh and unique perspective. Our team applies 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 the risk of controversy or disputes.
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. This 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 CAS standards and the accounting system functionality.
Unlike FAR Part 31, the CAS, 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:
To learn more about how we help clients tackle CAS compliance, check out these additional sections:
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. In addition, they 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. It should also 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.
Contractors with 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:
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:
Our government contracting professionals help clients prepare adequate incurred cost submissions, which are submitted for DCAA audit and review. 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. Thus, the goalposts occasionally move without notice or explanation. Our professionals will help ensure your DCAA ICE submission withstands audit scrutiny.
After submission, we help our clients in the following important ways:
We have extensive experience working collaboratively with client personnel, and communicating effectively with government auditors and contracting officers.
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. We then analyze alternative indirect cost accounting scenarios to optimize cost recovery and competitiveness. Our team works to ensure 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:
We help many of the largest contractors navigate highly complex cost accounting and related compliance challenges.Thomas Tagle, Partner, CPA