1

Accounting for Federal

Contractors

Presented By: Marty Herbert

2

With SCORE, You Are Not Alone on Your

JourneyFor over 50 years, SCORE has served

as America’s premier source of free

business mentoring and education.

As a resource partner of the U.S.

Small Business Administration (SBA),

SCORE has helped more than 11

million entrepreneurs through

mentoring, workshops and educational

resources since 1964.

3

SCORE Can Help You Find the Way Ahead

• Free one-on-one business

counseling and mentoring

• Business advisory services

• Low cost local workshops

• Free templates and recorded

webinars

To meet with a mentor or learn more

about SCORE’s resources, visit

washingtondc.score.org

4

• Introductions

• Costs

• Contract Types

• Firm Fixed Price

• Time & Materials

• Cost Plus

• Pricing Concepts

• DCAA Introduction

• Cash Management

Workshop Agenda

5

Introductions

6

NeoSystems Overview

• Leading Back Office Service Provider for:

• Government Contractors

• Nonprofit and Trade Associations

• Commercial and Federal Divisions (Enterprise)

• Alliance and Partner Network

• Leading Deltek Platinum Partner

• NetSuite BPO and Solution Provider

• Citrix and VMWare Certified Solution Provider

• Comprehensive Suite of Strategic Back Office Services

• Accounting

• Association and Member Management

• Financial Planning & Analysis

• Human Capital and Recruiting Management

• IT Infrastructure, Hosting and Security

• Consulting and Training

• Systems Integration and Implementation

• Governance and Compliance

7

Marty Herbert

Director, Business Process Automation

18+ years of government contracting experience including 5 years with

DCAA on financial and technical/operations audit teams

Workshop Instructor

First Tip: In addition to the Information for Contractors guide, DCAA offers targeted

information to assist with audit issues that relate to small businesses.

8

Intros

ACTIVITY #1

9

Pre Award Post Award

Contracting office will conduct a

preaward survey to consider the

accounting system of the prospective

contractor

DFARS defines an acceptable accounting

system and subsystems that may be

involved

Design of the accounting system is part

of the PreAward Survey (SF1408)

FAR and DFARS require:

• Segregation of direct from indirect

costs

• Total costs = Direct + Indirect

• Allowability of costs

• Reasonableness

• Allocability

You should be prepared to demonstrate

how the accounting system satisfies the

criteria of the SF1408

Compliant Accounting System

10

Costs

11

• Cost

• The actual costs incurred or realized in the manufacture of a product of

the providing of a service. “Cost” is the actual amounts paid for the

necessary elements of providing a good or service, such as labor, factory

overheads, cost of materials, and other relevant support costs.

• Price

• Whatever a consumer of a Good or Service is willing to pay for that

Good or Service – or conversely - whatever a provider of a Good or

Service is able to charge a consumer for that Good or Service, dictated

by the market

Cost vs. Price

12

• Falsifying, concealing, or covering up via:

• Statements or representation of costs incurred

• Making or using any false writing or documentation

• Penalties

• Fines

• Imprisonment

• Ability to contract with the government

Misrepresenting Costs

13

• Reimbursable Costs:

• Allowable

• Reasonable

• Allocable

• Total Costs:

• Direct Costs

• Indirect Costs

Cost and Pricing Principles

14

• A cost is allowable only when it complies with the following:

• Reasonableness

• Allocability

• Terms of the Contract

• Applicable Cost Accounting Standards

• FAR 31.205

Allowability (FAR 31.201-2)

15

• A cost is reasonable if:

• In its nature and amount, it does not exceed that which would be

incurred by a prudent person in the conduct of competitive

business

• It is your responsibility to establish that a cost is reasonable.

Reasonableness (FAR 31.201-3)

16

• A cost is allocable to a government contract if it:

• Is incurred specifically for the contract,

• Benefits both the contract and other work, and can be

distributed to them in reasonable proportion to the benefit

received, OR

• Is necessary to the overall operation of the business, although a

direct relationship to any particular cost objective cannot be

shown.

Allocable (FAR 31.201-4)

17

• Any cost which is identified specifically with a particular cost

objective on a contract

• Charge directly to the contract

• Cannot have been included in any indirect cost pool

Direct Costs

18

• Examples

• Direct labor

• Direct travel

• Consultants

• Subcontractors

• Materials

• Exceptions

• Some administrative duties if large workload

• Lowers G&A/Increases direct costs

Direct Costs (continued)

19

• Found in FAR 31.203

• Any cost not directly identified with a single, final cost objective,

but identified with two or more final cost objectives

• After direct costs have been determined and charged directly to

the contract or other work, indirect costs are those remaining

to be allocated to the several cost objectives

Indirect Costs

20

Fruits and Veggies

ACTIVITY #2

21

• Fringe Benefits

• Overhead costs

• General & Administrative (G&A) costs

Rate Calculation

Indirect Cost Pool = Indirect Rate

Indirect Cost Base

Indirect Costs and Rate Calculation

22

• Any employer paid payroll tax

• Employer provided insurance

• Paid Time Off (PTO)

• Other employee benefits

Fringe Benefit Costs

23

• Employer portion of FICA (Social Security & Medicare)

• Federal & State Unemployment Insurance

• Worker’s Compensation Insurance

• Health and life insurance

• PTO, sick leave, & comp time

• Holidays

• 401K Match

• Bonus payouts*

Fringe Benefits Cost Pool

24

• Total Productive Labor

• All wages excluding PTO, sick leave, holidays, etc.

• Includes:

• Direct, Overhead, and G&A labor

• Business Development/Bid & Proposal labor

• Material Handling labor

Fringe Benefits Cost Base

25

• All costs not charged directly to a contract

• These costs are typically:

• Incurred for more than one contract

• In support of contracts

Overhead Costs

26

• Indirect labor and supervision (not charged direct)

• Employee related expenses

• Training Costs

• Indirect travel

• Indirect materials

• Office supplies

• Postage and shipping

Overhead Cost Pool

27

• Fixed charges

• Depreciation

• Rent

• Utilities

• Internet

• Electricity

Overhead Cost Pool (continued)

28

• Direct Labor dollars PLUS Fringe Benefits

• Unless manufacturing business

• Complex

• Additional variables used as base cost

Typical Overhead Cost Base

29

• Any general management, financial, administrative labor, or other

expense

• Incurred for the benefit of the Corporation as a whole

General & Administrative Costs

30

• Administrative & executive expenses

• Legal, accounting, public relations, & financial services

• Business insurance

• Other taxes, e.g. BPOL

• Independent research & development*

• Bid & proposal**

• Other miscellaneous

G&A Cost Pool

31

• Total Cost Input (TCI)

• Total cost excluding G&A expenses

• Examples

• All direct costs

• Total fringe and overhead costs combined

Typical G&A Cost Base

32

Salary 100,000.00

• Raw Labor $48.08

• Fringe 32%= $15.39

• Overhead 24%= $15.23

• G&A 8%= $6.29

• TOTAL COST= $84.99

• Fee 10% = 8.49

• TOTAL BILL RATE = $93.48

WRAP RATE = 1.944

Rate Build Up

x Fee Percentage

(DL + FB + O/H + G&A) x Fee % = Amount

x General and Administrative (G&A) Rate

(DL + FB + O/H) x G&A = Amount

x Overhead (O/H) Rate

(DL + FB) x O/H = Amount

Direct Labor (DL) x Fringe Benefits (FB) Rate

DL x FB = Amount

33

• Supporting schedules?

• Spreadsheets?

• Reports?

• Written Descriptions?

• Have a detailed explanation of:

• How costs are classified and accounted for

• How indirect rates are calculated

What is Your Basis for Support?

34

• Get everything in writing

• Brief your contracts

• Exclude unallowable costs from submissions

• Provide support for all costs

• Notify CO/DCAA of policy changes

• Report any updated info prior to final negotiation

• Consistency

• Maintain files on activity after award

• Use FAR as guide

• Adequate accounting system

Keys to Cover Yourself

35

Contract Types and Pricing

Concepts

36

• Firm Fixed Price (FFP)

• Cost-Plus Award/Fixed Fee (CPAF/CPFF)

• Time & Materials (T&M)

Contract Types

37

Government Contract Spending

38

Small Business Spending

39

Contract Type Risks – Govt Perspective

Fixed-Price T&M Cost-Reimbursements

FFP FPI CPAF CPFF

Seller’s(Contractor) Risk(High) (Low)

(Types of Contracts)

40

• When definite performance specifications are available

• Set price for work to be done

• Found in FAR 16.202-2

Firm Fixed Price (FFP) Contracts

41

• Maximum profit potential

• Incentive to

• Control costs

• Improve profits

• Deliver on-time

• Pricing is typically less complex

FFP Contract Benefits

42

• Contractor assumes full cost responsibility

• Both labor and materials

• Lowest price, technically acceptable

• High performance and schedule risk

FFP Contract Risks

43

• In bidding process, know the impacts of ALL contract requirements

and specifications

• Be EXACTLY sure work can be completed for proposed hours/costs

• Prevent any subcontractor overrun

FFP Contract Best Practices

44

• Suitable for use when Seller cannot accurately estimate the:

• Extent of work

• Duration of work

• Or anticipate costs with any reasonable degree of confidence

• Found in FAR 16.601

Time & Materials (T&M) Contracts

45

• Wide Salary variations within labor grades, salary may not cover

costs (provisional Rates)

• Internal rate changes can increase labor costs, reduce profit over

time

• Can be difficult to staff projects and quickly respond to customer

requirements

T&M Contract Risks

46

• Propose higher than normal rates if highly skilled/paid talent (esp. key

personnel) is required for the task

• Ensure forward pricing rates cover average of future costs including

reasonable profit

• If hours are limited in contract, limit total hours, and not by labor

category

T&M Contracts – Neo Tips

47

• Used only when uncertainties involved in contract performance do

not permit costs to be estimated with sufficient accuracy to use in

FFP type (FAR 16.301-2)

• Allowable profit limited to 2-8%

Cost-plus Fixed Fee (CPFF) Contracts

48

• Recoup all allowable direct and indirect costs associated with

contract

• Some flexibility when estimating costs

CPFF Contract Benefits

49

• Government not obligated to reimburse contractor for costs in

excess of estimates

• Must notify CO if cost estimates change

• Subject to:

• DCAA audits (System and financials)

• Incurred Cost Submissions

• Must ensure costs/billings are in-line with estimates

CPFF Contract Risks

50

• Watch contract costs and funding VERY closely!

• Notify CO of needed funding so that there is no need for risk

funding

• Monitor contract for scope creep

• Work off of provisional rates and adjust each year

• Notify CO and DCAA of changes to indirect rate structures or

policies and procedures

• No “Fee on top of Fee”

CPFF Best Practices

51

• Suitable where mission feasibility is established, but measurement of

performance/achievement is usually subjective (FAR 16.405-2)

• Allowable profit limited to 2-8%

Cost-plus Award Fee (CPAF) Contracts

52

• Award Fee may be earned in whole or in part during contract

performance (FAR 16.405-2(a))

• Recoup all allowable direct and indirect costs associated with

contract

• Some flexibility when estimating costs

CPAF Contract Benefits

53

• If performance is unsatisfactory or marginal, no award fee

• Award fee determination and amount are unilateral decisions made

solely at the discretion of the customer

• Not subject to appeal

• Subject to:

• DCAA audits

• Incurred Cost Submissions

CPAF Contract Risks

54

• Maintain satisfactory performance throughout contract

• Could result in early award fee

• Watch contract costs and funding closely!

• Notify CO of needed funding so that there is no need for risk

funding

• Work off of provisional rates and adjust each year

• Notify CO and DCAA of changes to indirect rate structures or

policies and procedures

CPAF Contract Best Practices

55

Contract Scenario Illustration

ACTIVITY #3

56

The U.S. Army wishes to procure a WIDGET from ECDC, Inc. on a Firm Fixed Price Basis ECDC charges

$103,500 (Price) and the Army agrees to pay $103,500

Comparative Illustration

Total Cost

Profit

Price

Profit as % of Cost =

Profit as % of Price =

Army Pays

ECDC Makes (Looses)

85,000

18,500

$ 103,500

21.7%

17.87%

$ 103,500

$ 18,500

$ 98,000

5,500

$ 103,500

5.6%

5.3%

$ 103,500

$ 5,500

$ 118,000

(14,500)

$ 103,500

(-12.2%)

(-14.0%)

$ 103,500

($14,500)

$ 90,000

13,500

$ 103,500

15%

13.1%

$ 103,500

$ 13,500

ECDC Estimate

@ ProposalScenario 1

Actual Performance

Scenario 2 Scenario 3

57

Estimated Cost

FCCM

Fixed Fee

Total CPFF (Price)

Profit as % of Cost =

Profit as % of Price =

Army Pays

ECDC Makes (Looses)

85,000

900

9,000

$ 94,900

10.59%

9.53%

$ 94,900

$ 9,000

$ 98,000

1,100

9,000

$ 108,100

9.1%

8.32%

$ 108,100

$ 9,000

$ 118,000

1,300

9,000

$ 128,300

7.6%

7.0%

$ 128,300

$9,000

$ 90,000

1,000

9,000

$ 100,000

10%

9%

$ 100,000

$ 9,000

ECDC Estimate

@ ProposalScenario 1 Actual Performance

Scenario 2Scenario 3

Although the Cost of Performance (Price) Increases, Fee Remains the same

(Fixed), as Cost of Performance Increases, Fee as Margin Decreases

The U.S. Army wishes to procure a WIDGET from ECDC, Inc. on a Cost Reimbursable Basis ECDC has an estimated Cost Plus Fixed Fee of $100,000

Comparative Illustration

58

GOALS• Cash Flow

• Profits

• Growth

• Past Performance

• Market Share

Pricing Principles – Why We Price

59

• Clear identification of task(s)

• Broad participation in pricing preparation

• Availability of valid data

• Standardized structure for estimating

• Recognition of inflation

• Recognition of excluded costs/burdens

• Revision of pricing estimates for significant program changes

Credible Characteristics of Pricing

60

Pricing Sources

ACTIVITY #4

61

Basic Primary and Secondary Data Sources

DATA Primary SecondaryAccounting Records XCost Reports XHistorical Databases X XLabor Distribution Reports X XIndirect Cost Reports X XContract Briefs X XContract Backlog X XSubject Matter Experts X XRecruiting X XTechnical Databases X XContract Estimates XCost Proposals XFocus Groups XResearch Papers XCompetitor Intel XSurveys X

Sources for Pricing

62

Uncertainty and risk in contract pricing arise from the following

sources:

• Lack of buyer understanding in RFP requirements

• Different interpretation of language

• Haste

• Deception

• Poor cost estimating and pricing practices

Major Risks in Contract Pricing

63

Salary 100,000.00

• Raw Labor $48.08

• Fringe 32%= $15.39

• Overhead 24%= $15.23

• G&A 8%= $6.29

• TOTAL COST= $84.99

• Fee 10% = 8.49

• TOTAL BILL RATE = $93.48

WRAP RATE = 1.767

Rate Build Up

x Fee Percentage

(DL + FB + O/H + G&A) x Fee % = Amount

x General and Administrative (G&A) Rate

(DL + FB + O/H) x G&A = Amount

x Overhead (O/H) Rate

(DL + FB) x O/H = Amount

Direct Labor (DL) x Fringe Benefits (FB) Rate

DL x FB = Amount

64

Pricing Build Up MatrixEscalation: 3.5%

Labor Cost Build-up Matrix

Company – Labor Categories Salary Hourly Rate Fringe @35.39% OH @ 10.32% G&A @ 16.80% Fee @ 6% Fully Loaded

Project Manager $150,000 $72.12 $25.52 $10.08 $18.10 $7.55 $133.36

Senior Application Architect $155,000 $74.52 $26.37 $10.41 $18.70 $7.80 $137.80

Senior Sharepoint Developer $145,000 $69.71 $24.67 $9.74 $17.49 $7.30 $128.91

Intermediate Application Developer $120,000 $57.69 $20.42 $8.06 $14.48 $6.04 $106.69

Senior Application Developer $145,000 $69.71 $24.67 $9.74 $17.49 $7.30 $128.91

Infopath Developer $115,000 $55.29 $19.57 $7.73 $13.87 $5.79 $102.24

Web Developer $100,000 $48.08 $17.01 $6.72 $12.06 $5.03 $88.91

Business Analyst $100,000 $48.08 $17.01 $6.72 $12.06 $5.03 $88.91

65

Pricing Matrix - Burdened

Company – Labor Categories Company Base PeriodOption

YR1Option

YR2Option

YR3Option

Y4

Project Manager ABC COMPANY $133.36 $138.03 $142.86 $147.86 $153.03

Senior Application Architect ABC COMPANY $137.80 $142.63 $147.62 $152.78 $158.13

Senior Sharepoint Developer ABC COMPANY $128.91 $133.42 $138.09 $142.93 $147.93

Intermediate Application Developer ABC COMPANY $106.69 $110.42 $114.28 $118.28 $122.42

Senior Application Developer ABC COMPANY $128.91 $133.42 $138.09 $142.93 $147.93

Infopath Developer ABC COMPANY $102.24 $105.82 $109.52 $113.36 $117.32

Web Developer ABC COMPANY $88.91 $92.02 $95.24 $98.57 $ 102.02

Business Analyst ABC COMPANY $88.91 $92.02 $95.24 $98.57 $102.02

66

• Utilized for both pricing and billing

• Must be reconciled to actual rates at contract closeout for Cost-plus contracts

• Audited by DCAA

• Baseline frame of reference for auditors reviewing proposals and billings

• Used for billing existing contracts and for pricing new work

• Any change must be supported by data regarding actual running rate experience

• May start a series of questions by DCAA

Provisional Rate Pricing

67

Actuals:

SALARY = $100,000

Hourly Rate= $48.07

Fringe Rate 30%= $14.42

OH Rate 25%= $15.62

G&A Rate 9%= $7.03

Fully Burdened Rate= $85.14

Wrap rate of 1.77

Provisional Rate Pricing (continued)

Provisional Rate:

SALARY = $100,000

Hourly Rate= $48.07

Fringe Rate 28%= $13.46

OH Rate 15%= $9.23

G&A Rate 8%= $5.66

Fully Burdened Rate= $76.42

Wrap rate of 1.59

68

• More competitive pricing

• Advanced capabilities in estimating and forecasting

• Being able to compare Actuals vs. Target rates

• Ability to monitor and control costs

• DCAA interaction

Advantages

69

• Follow directions!

• Follow directions!

• Follow directions!

Best Practices – Cost Volume

70

Audit Types and Tips on Staying Ahead

DCAA Introduction

71

• All activities related to proposed or incurred costs

• Indirect Rate Structures

• Contract and Invoicing Files

• Provisional Rate Submittals

• Financial Policies, Procedures, and Internal Controls

• Opportunities to reduce or avoid costs

General Areas of Interest for DCAA Audits

72

• Request a list of items to prepare

• Request an estimated time frame/length

• Know your basis of support

• Document audit log

• Contract terms & Conditions

• Ability to provide supporting schedules and other documentation in

detail

• Request a copy of audit report

Tips on Staying Ahead

73

Cash Management, Cash

Forecasting

74

Cash in (Inflow)

• Cash from credit card sales

• Receivables

• Interest Income

• Rebates/Refunds

• Line of Credit

• Other Financing

What is Cash Flow?

Cash out (Outflow)

• Payroll

• Benefits

• SUBKs/Consultants

• Rent

• Utilities

• Office Expenses

• Asset Purchases

• Debt Payments including

interest

Common Question:

Why is my cash balance

negative when my income

statement shows profit?

75

Benefits

• Short and long-term visibility to demands

• Forecast alerts you when you will potentially have a cash shortfall

• Ability to manage your business more effectively

Best Practices

• Living document - maintain and update regularly short term & long term

forecasts

• Weekly, semi-monthly, monthly, and annually

• Daily monitoring

Cash Flow Forecast Benefits and Best Practices

76

Projecting revenue and expenses

• Use historical trends

• Take a conservative approach when projecting cash inflow

• Utilize your AR to determine how often receivables are

paid(e.g., 65% paid within 30 days, 30% paid within 60 days, 5%

paid 75+ days)

Cash Flow Forecast Methods

77

• Take less conservative approach for projecting cash outflows

• Review Check Register

• Review Budgets and cost proposals

• Review Payroll and Taxes

• Capitalized purchases require a cash outlay

• LOC repayment (plus interest payments)

Cash Flow Forecast Methods (continued)

78

Sample Cash Forecast

79

Cutting Expenses is a tough thing to do!

• When/What to cut expenses

- Cash outflow is consistently higher than cash inflow

- Loss of Revenue/Sales

- Discretionary spending

Cost Cutting

80

• “Am I next” concerns

• Employee Recruiting/Retention

• Less generous benefits package

• Same work level - less hands

• Company morale issues

• Business runs more efficiently

• Company can survive

Impacts of Cost Cutting

81

• Know your Key metrics/data

• Proactive collection process

• Don’t wait until day 31.

• Control spending

• Accounts Payable terms (net 30)

• Utilize your banking relationships

• Know Tax Payment deadlines (i.e. BPOL, Payroll, Other)

• Avoid penalties & fines – nothing but a drain on your cash.

Managing Your Cash

82

• Accounts Receivables

• Invoicing top priority at end of month

• Understand definition of a “proper Invoice”

• Monitor AR - paid within 30 days, 60 days, 70+ days, etc.

• Review receivables for issues on a regular basis

• Accounts Payable

• Use vendor discounts to your financial advantage

• Develop purchasing policies within the company

• Utilize company credit cards when practical

• AVOID OVERLEVERAGING!!!

Cash Flow Tips

83

• Still applies to this day and age

• Trusted financial advisors can provide valuable:

• Insight to business owners

• Creative financing options

• Minimize financial obstacles and road blocks

• Basis for your solid financial decisions process

• Solid business systems & internal controls provided a great basis cash

management

Cash is KING!

84

• Business Growth

• Investments in resources(employees, infrastructure, technology,

etc… )

• Invest in new business markets (verticals)

• Improved employee morale

• Stronger vendor relations

• Less Financial Stress

Successful Cash Flow Management

85

Important Business Metrics

86

Important Business Metrics - DSO

Acme Corp – Monthly DSO

DSO (Day Sales Outstanding) gives insight into the timing of cash collection

87

Important Business Metrics - Utilization

Higher utilization → higher receivables

88

Important Business Metrics - Revenue

Revenue trends are valuable because revenue leads to receivables.

89

Important Business Metrics – Indirect Rates

Monitor Indirect Rates

90

• SBA – www.sba.gov

• DCAA – www.dcaa.mil

• FAR – www.acquisition.gov/far

• FBO – www.fedbizopps.gov

• Gov Store – http://bookstore.gpo.gov

Resources

91

• Deltek Costpoint Training Courses

• NeoSystems Blog center

• GrowAhead@NeoSystemsCorp.com

Resources (continued)

92

Q&A

Marty HerbertManager of Business Process Automation

mherbert@neosystemscorp.com

93