Government Contract Compliance
What does it mean to be “compliant”? In the case of Government contracts, who are you complying with?
Well, the answer to that might be easy. We comply with the Government’s rules and regulations. But how do we do that? Who knows if we have been naughty or nice? Do they come looking for us like the IRS and tell us to be prepared because we are getting audited? Do we submit anything to anyone that holds us accountable on a regular basis?
Let’s look at this!
The Defense Contract Audit Agency (DCAA) is the cognizant audit agency that is responsible for performing audits to ensure Government compliance with FAR. Predominantly, it is the Federal Acquisition Regulations (FAR) which determines how contracts with the Federal Government are regulated. DCAA approves a company’s accounting system for the Federal Government. DCAA approves a company’s indirect cost rates (Overhead, General Administration, Fringe Benefits, Material and Handling etc.). What is the purpose of these audits? Why do FAR regulations exist? FAR regulations exist to minimize the financial risk of the Government and thus, saving the taxpayers’ money.
Once an accounting system is approved, it is approved. However, indirect cost rates will go across the desk of a Contracting Officer if you bid on Requests for Proposals. How does the Contracting Officer determine that they are fair and reasonable? Why, they are reviewed by DCAA by request of the Contracting Officer!
So, our contracts go to DCAA for audits of indirect cost rates on a frequent basis if we are competing in the open Federal Government contract market.
This is all about being in compliance and the best way to be in compliance and to remain in compliance is to be proactive with the infrastructure of your business. What does that mean?
It means that, from the very beginning of doing Federal Government contracts, you must set up your accounting system so that it will meet DCAA requirements. How is this achieved? You must seek a firm who is knowledgeable, and experienced about the FAR regulations. Remember, Government contracting is a special niche which requires customized and flexible solutions for the technical issues that comes with government cost accounting.
And what about Indirect Cost Rates?
The important thing to remember is that a small business will have rates that go up and down a lot in the beginning. You must calculate your indirect cost rates as it is stipulated in the FAR and bill your Prime contractor or the Government accordingly. Basically, it is simple. Your total costs are compared to those that are related to overhead as a percentage. The same is done for your other indirect costs.
These “cost pools” and their ratio to the expenses in each category of indirect costs are calculated as of the date of their implementation. Those Indirect Cost Rates are then applied to labor costs. A labor rate submitted on a Government proposal is then “burdened” in that it contains the applicable indirect costs and wrapped into a combined cost. Rule #1, aside from accurate math calculations, is consistency. You must settle on the indirect rates you are going to use for a time period and ask the DCAA to make a determination as to their reasonableness. Provision is made for the time constraints in proceeding with the process. Small businesses in particular with rates that go up and down need to revisit their rates annually.
This is where the term Provisional Indirect Cost Rates comes from. The DCAA will allow you to predict your actual indirect rate costs and make provisions for you to use those rates in your bids until they are audited and either accepted or adjusted. If an adjustment is necessary, then it is made before the contract is closed out.
DCAA will come to audit your accounting system. They determine that it can calculate and burden these indirect cost rates along with allocating, allowing or disallowing, all costs incurred to the contracts. This will occur when you bid on contracts that are large enough to require an approved accounting system. As a subcontractor, a small business may not need to have an approved accounting system; that is until they work on a contract that is awarded over a certain amount. This is determined by The FAR and the amount changes periodically.
This is just a short and vague description of the auditing functions of the Government but it makes two things very clear:
- Compliance from the beginning will save you much consternation later on. This includes timekeeping compliance to support your costs.
- Understanding Cost Accounting Standards is of top priority for contractors and subcontractors.
Please refer to the following link for an excellent resource of information on this subject (given by DCAA).
Does this seem to be overwhelming? Contact me and I will refer you to a Compliance Professional who is working with Contract Connections Administration Services. Sign in to my website so that you will be informed of any changes in the area of this part of Federal Government contracting.
Cheryl Ann De Pace www.thecontractnavigator.com / Mark Vilches Main@dcaaspecialists.com 410-302-6251