Requirements for Accounting Systems Every
Government Contractor Needs to Know
The Challenge of Cost Reimbursement Contracts
FAR 16.301-3 states that “a cost-reimbursement type contract may be used only when the contractors
accounting system is adequate for determining costs applicable to the contract.” Your government agency
client may request that the Defense Contract Audit Agency (DCAA) prepare a “Pre-Award Survey of
Prospective Contractor Accounting System” (SF1408). The checklist on this survey includes 15 items which
must be met in order to pass the DCAA audit and either win or keep the contract.
The Optimum Microsoft Solution
Microsoft Dynamics SL is a financial management and project accounting software application that provides
accounting and tracking features out of the box that are a perfect fit for government contracting. When
utilized by companies with clear written policies and procedures and properly trained staff, Dynamics SL
provides the necessary tools for accounting for cost reimbursement type government contracts.
The Requirements and How to Pass Them
Below are the 15 Requirements and a comment on the ability of Dynamics SL to meet each one.
1. Is the accounting system in accord with generally accepted accounting principles? – Dynamics
SL is an accrual based accounting system which enables companies with properly defined policy and
procedures, to prepare financial statement in accordance with GAAP.
THE ACCOUNTING SYSTEM PROVIDES FOR:
2. Proper segregation of direct costs from indirect costs. – The Dynamics SL system has the ability to
setup the “chart of accounts” and “cost pools” (subaccounts) to provide the ability to classify
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expenses as direct and indirect costs.
3. Identification and accumulation of direct cost by contract – The Dynamics SL system has a
Project Controller module which provides the ability to charge direct costs to projects (contracts).
4. Logical and consistent method for allocation of indirect costs – Dynamics SL has a Project
Allocator module and Indirect Rate Calculator, which provide the ability to apply or allocate indirect
costs to projects (contracts). Initially, the company may establish and allocate costs using
“provisional” indirect cost rates and then once actual indirect rates are known (at year end), allocate
any variances (due to differences between provisional and actual indirect rates) to contracts.
5. Accumulation of cost under General Ledger control – The Project Controller module is a subsidiary
system of the General Ledger. As a result, as costs are charged to the General Ledger “accounts”
the project controller system is simultaneously update. This ensures that the project controller
system is always “in sync” with the General Ledger control accounts.
6. A timekeeping system that identifies labor by intermediate and final cost objectives – The
Dynamics SL system has a Timecard and Expense module providing the ability to charge both labor
hours and costs to intermediate (service departments which might be charged to project using
indirect rates) and final cost objectives (projects/contracts).
7. A labor distribution system that charges direct and indirect labor to cost objectives – The
Dynamics SL system provides the ability to cost intermediate and final cost objectives upon timecard
entry or upon timecard approval, as appropriate,
8. Interim (at least monthly) determination of costs charged to a contract through routine posting
of books of account – The Dynamics SL system is period based, meaning the system accumulates
revenue and expenses by reporting period (e.g., month). Revenues and costs are recorded through
various modules (e.g., Accounts Payable, Accounts Receivable, Timecard, etc.) creating journal
postings to the General Ledger.
9. Exclusion from costs charged to government contracts of amounts which are not allowable in
terms of FAR 231, Contract Cost Principles and Procedures, or other contract provisions –The
Dynamics SL system has the ability to capture unallowable costs in separate accounts or cost pools.
Further, the system can be configured so that unallowables, while recorded as a cost to a
government contract, are never “billed (or charged in government terms)” to the government (e.g.,
contract travel expenses incurred on a contract in excess of allowed per travel per Diem). Further,
the system can be configured so that unallowable costs are excluded from the determination of
indirect cost rates so that the government is never charged directly or indirectly through the
application of indirect costs on cost plus type contracts.
10. Identification of cost by line item and units (as if each unit or line item were a separate contract)
if required by the proposed contract – The Dynamics SL system has the ability to create projects
and tasks (Typically, a CLIN or SCLIN on government contract) within a project. Costs (and revenues
for that matter) can be accumulated by tasks providing the ability to perform cost and
revenue/billing accounting at the task level. As a result, each task can be accounted for as if it were
a separate contract even though it is part of a single contract.
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11. Segregation of preproduction costs from production costs – The Dynamics SL system can be
configured so that preproduction costs are charged to separate project/tasks and or General Ledger
accounts. This provides the ability to separate preproduction costs from production costs.
THE ACCOUNTING SYSTEM PROVIDES FINANCIAL INFORMATION:
12. Required by contract clauses concerning limitation of costs (FAR 52.232-20 and 21) or limitation on
payments (FAR 52.216-16) – Dynamics SL can be configured to alert the company when costs
incurred to date plus estimated costs in the next 60 days will exceed 75% of the authorized funding
of a project. This provides the company the ability to notify the government on a cost plus type
contract that actual costs will exceed authorized funding levels. Further the system can be
configured so that the Government will not be billed in excess of authorized funding amounts using
the guaranteed maximum at the project and/or task (CLIN/SCLIN) levels.
13. Required to support requests for progress payments –The Dynamics SL system will provide detail
cost ledgers by contract to support requests for progress payments. When project payments are
requested, the company must be able to substantiate that it has incurred the costs as the reason to
request the progress payment.
14. Is the accounting system designed, and are the records maintained in such a manner that adequate,
reliable data are developed for use in pricing follow-on acquisitions? The Dynamics SL system has
the ability to accumulate historical direct and indirect costs accurately so that the costing of requests
for change orders (pricing follow-on acquisitions) will be developed using the same costing principles
used in the actual General Ledger system.
15. Is the accounting system currently in full operations – The last question of Form SF1408 relates to
the status of the accounting system. Accordingly, the answer would be “No” until such time that the
system was configured, tested, your staff is trained, and it is put into full operations.
Dynamics SL meets all the criteria required by the government if properly planned, configured, and
implemented and staff training is provided. Remember that an “adequate accounting system” encompasses
far more than just the implementation of a software tool. Your company will need well documented processes
and control procedures, including adequately trained staff with knowledge of the government requirements.
Synergy Business Solutions assists clients with proper software implementation and configuration and
provides recommendations on best practices which might be deployed to meet government regulations.
www.synergybusiness.com
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