Government Contract Accounting FAQ
There are government contract accounting questions that frequently come up during the course of recording transactions or bookkeeping. These questions seems to be popular among our clients and potential clients, no matter what the tenure.
1. What is an allowable/unallowable cost?
When a government contractor wins a government contract, not only can the government contractor bill (or “recover”) the direct cost portion that was incurred, but can also bill associated indirect costs. These indirect costs (usually fringe costs, G&A and overhead expenses) can be invoiced to the government as long as they are “allowable”. For a cost to be “allowable” per the Federal Acquisition Regulations (FAR), it must be allocable and reasonable.
2. What is the difference between “unallowable” and “”deductible”?
Please note that “allowability” and “deductibility” are two separate concepts. Allowability is a FAR concept which determines if such cost can be “recovered” (i.e. reimbursed) by the federal government. Deductibility is an Internal Revenue Code (IRC) concept that determines if an expense can be used to reduce the taxable income. Generally speaking, an expense can be both unallowable and not deductible (such as political contribution), or deductible but unallowable (such as interest expense). It all depends on the nature of the transaction and the guidelines set forth in the IRC and FAR.
3. What is the difference between G&A (General and Administrative) expense and Overhead expense?
In general, government contractors incur G&A costs to support the company overall. Whereas, you associate overhead costs with the supporting the contracts, but not specifically identifiable to a particular contract. For example, if a company were to obtain general liability insurance, that cost would be G&A. However, if the company were to obtain Defense Base Act insurance (also known as DBA insurance for short) due to the requirements of various task orders, this could be considered overhead. Now, if a specific cost is directly linked to a particular job performed, then it is considered as a direct cost. Even if it is nonbillable.
4. Where do I record nonbillable direct costs?
Many contractors incur direct costs that they deem nonbillable and then decide to record them as overhead costs or unallowable indirect cost. For example, a contractor has to obtain travel insurance for a particular task order as a contract requirement. The government tells the contractor that the cost of the insurance is not covered in the contract and thus nonbillable. The contractor records that expense as overhead. This is incorrect since this cost, which is specifically required for a task order, will be allocated to all contracts through the overhead cost rate. Instead, this expense should be recorded as a direct cost (but not billed) so the true cost and profitability of the task can be reflected.
Other nonbillable direct costs may include specific or unique training, amounts in excess of travel regulations, materials, etc. It is important to determine if there is a unique beneficiary of the costs. For example, the cost is unique to a particular task order or contract. Also, is the assignment of the cost consistent with the treatment of similar expenses with similar purposes. Various contractors handle the treatment of “direct” unallowable costs differently as per guidance in the the FAR. However, consistency is the key.
5. When do I charge Bid & Proposal (B&P)?
The appropriate route is to charge Bid and Proposal when you begin incurring costs to respond to an Request for Proposal (RFP) or Request for Quote (RFQ). This is in accordance with FAR 31.205-18. The costs you incur could be labor of your staff, consultants providing assistance, and supplies such as printing (OK, maybe pre-COVID), meals for those late night proposal discussions, etc. Indirect cost rate allocations treat B&P like a job for allocations of fringe and overhead. However, it winds up in the G&A pool.
Now, when it comes to labor, you should consider the point of charging B&P rather than G&A, solely for your technical staff. Your technical staff should have their portion of overhead follow them. It does not matter what they are working on. You should not have your G&A or overhead staff charge to B&P Labor. if you do, then you will be charging a portion of overhead costs that they do not normally have apportioned on their labor. Additionally, charging B&P begins with the decision to submit a proposal or quote. It does not matter if you win or lose the bid. Those costs will remain in B&P.
6. Do I need a new job number when I received a contract modification?
Now, this is a tricky question because there are numerous scenarios. Also, often the customer does not provide funding on the contract in accordance with how they intend you to bill them. DCAA requires that you have the ability to track your direct costs and billing, by contract, contract line item, task order, delivery item, or funding document. The funding document is key. The reason being, if you bill more than funding, you are overbilling the customer, regardless of the value of the contract. Also, depending on the contract type, The government may require you to give notice when you expend 75% or 85% of funding.
Generally, we follow a rule of creating jobs for each new funding document. For example, if you receive funding for a new task order on a continuing contract, we would set up a “subjob” for the new task order. If you receive option year 2 funding, which often is for CLINs in the existing contract that the government did not previously fund. If the CLINs are set up as labor categories, we may use 2 different approaches. We may set up a new job for the option year (under the existing contract). Another option is to set up new labor categories with the new option year pricing. In both situations, the costs you incur and bill can be summarized for the option year funding.
We typically do not set up a new job if the purpose of the new funding document is to fully fund. This occurs when the government partially funds the original contract, task order, CLINs or delivery order. Even when we add new jobs, it is usually a tiered approach so the each level of funding can roll up to a higher level for reporting purposes.
7. Should I assign jobs to Overhead projects?
Well, it depends on how you want to use the information in your accounting system. It does make evaluating how much you spent on a major internal project easier. However, let’s be clear, that every “job” in your accounting system is not direct cost for the purposes of indirect cost rate calculations, incurred cost submissions and billing the customer. You can set up internal jobs to track internal and overhead projects. It even keeps indirect cost charging nice, neat, and consistent. However, you must take extra precautions not to mix the assignment of internal project costs with direct costs. The direct cost accounts in your accounting system should not have any internal or overhead project transactions. The same applies visa versa.
8. Is QuickBooks Online (QBO), DCAA-compliant?
The short answer is NO. It’s just not there yet. Check out our previous blog, QBO Still Not for Government Contracts. We’ll be the first to applaud if it does change.
The rules of government contract accounting don’t change that often. There’s always a question that keeps pinging. Cheryl Jefferson & Associates is available if you are looking to outsource your government contract accounting needs or need assistance with government contract management.
Originally written by Sam Wu, August 2010
Updated and additional content provided by Cheryl Jefferson Cooke, CPA|CFF, CFE