What Accounting Policies Should a GovCon Implement? (Part 3 of 4)

Key Details: Adequate and compliant accounting policies and procedures are essential in government contracting. Establishing, maintaining, and revising your policies and procedures from the start of your business will create good habits and allow you to quickly ramp up your system as larger and more complicated contracts are awarded. An adequate accounting system will help ensure compliance with general accepted accounting principles (GAAP), federal acquisition regulations (FAR) and Defense Contract Audit Agency (DCAA) Standard Form (SF) 1408, ensuring you can be awarded complex contracts such as const reimbursement type contracts.

From creation to implementation, Ryan & Wetmore is poised to take your business and accounting system to the next level. The article below will highlight the most common accounting policies and procedures you should have as a government contractor. Readers should note that there may be additional policies applicable to your business. As such, government contractors are encouraged to contact us today to begin their accounting system compliance journey.

View Part 1 here and Part 2 here?. Part 3 of this 4-part series dives into the accounting system related policies that a government contractor should establish. For a discussion of compensation and HR related policies, stay tuned for future updates.

Note that this article only discusses adequate accounting system policies. Contractors should also aim to have other compliant systems in place such as a purchasing and estimating system.

Billing Policy

A billing policy should contain adequate controls and procedures to ensure that billings to the U.S. government are based on accurate hours, cost, and fee / profit information. The policy should ensure that the billings comply with applicable contract terms, limitations, and other relevant government regulations. This applies to federal contracts and subcontracts where progress billings are permitted. Essential procedures such as the following should be included in a billing policy:

1. Explanation of contract or project setup within the accounting system. Essential contract information to include are as follows:

• Explanation of contract or project setup within the accounting system. Essential contract information to include are as follows:
• Contract price, ceiling amount, and funded amount (if applicable)
• Period of performance for the funded amount
• Cost restrictions (if applicable)
• Billing method and invoicing procedures
• Government payment office address
• Relevant contract clauses

2. Assign a unique project code to each project, task order, or contract line-item number (CLIN) within the job cost system.

3. Assign the appropriate workforce to charge time to the project code via a timesheet tracking system.

4. Invoice Preparation:

Designate a party responsible for preparing invoices for payments, typically submitted monthly.

• Accumulate direct costs by contract, subcontract, or task based on actual job cost information for the billing period.
• Prepare invoices based on actual direct costs from the job cost system.
• Calculate applicable indirect costs using the most current provisional indirect billing rate.

5. Time & material (T&M) or labor hour contracts:

• Obtain actual direct labor hours by labor category and actual other direct costs (if T&M) from the job cost and timekeeping system.
• Ensure labor hours worked are assigned to the appropriate contract labor category
• Verify that cumulative billed labor hours do not exceed contract limitations.

6. Controller responsibilities:

• Ensure cumulative billed costs stay within funding limitations.
• Monitor any cost restrictions or limitations of funds provisions in the contract.
• Ensure unallowable costs are not billed.
• Perform a final review of the invoice before sending it to the customer.

7. Physically or electronically retain invoices and regularly review open accounts receivable.

Government contractors should note that different contract types may require additional procedures. Contact an advisor today to learn more.

Close Policy

The purpose of a close policy is to set forth the procedures for closing books regularly so that all transactions are recorded in the proper accounting period and promptly in accordance with Generally Accepted Accounting Principles (GAAP). Through this, government contractors can determine on an interim basis the costs charged to contracts in accordance with FAR and DCAA requirements. Essential items to include within a close policy are noted below:

Ensure expenses and revenues are recorded in the correct accounting periods under the accrual basis accounting method

Month-end close process:

• Complete within 30 days (about 4 and a half weeks) after the end of each month
• Involves reconciliations, adjustments, and financial report reviews to record expenses and revenue as accrued

Month-end close process details:

• Complete bank reconciliations
• Record any unbilled accounts receivable
• Record accounts payable and other cost accruals
• Adjust payroll and vacation accounts
• Review and adjust schedules for prepaid accounts, deferred rent, and depreciation
• Review open journal entries
• Prepare a monthly report package for review

Capitalization and Fixed Assets

A capitalization and fixed asset policy ensures fixed assets are accurately accounted for and in compliance with applicable regulations and in accordance with GAAP. Through this, government contractors can ensure that fixed asset purchases are correctly identified, and that the capitalization threshold is reviewed and followed. Essential elements to include within a capitalization and fixed asset policy include:

Asset identification and classification

• Definition of capital assets to establish the criteria for classifying assets as capitalized. This is typically based on cost, useful life, and the nature of the asset.
• Identification of asset categories to clearly identify items such as buildings, machinery, equipment, land, and improvements.

Acquisition procedures

• Adequate approval documentation from designated personnel prior to asset acquisition, ensuring budget compliance and alignment with strategic goals.
• Records are maintained for all acquisitions including purchase agreements, invoices, and supporting documents.

Recording and valuation

• All assets are recorded in the accounting system at their historical cost, including acquisition cost, installation, and any necessary improvements.
• The depreciation method is established and is consistent for depreciating assets over their useful lives, following relevant accounting and government regulations.
• Procedures are implemented for periodic asset re-valuation if necessary.

Maintenance and disposal

• Guidelines for the regular maintenance and management of assets to extend their useful life and operational efficiency.
• Procedures for the disposal of assets, including proper documentation and compliance with various regulations.

Reporting and review

• Regular reviews of assets are conducted to ensure accurate records.
• Reconciliation of the asset ledger to the general ledger.

Internal Controls and Flowcharts

Government contractors are encouraged to develop adequate internal controls within their accounting system to ensure accurate tracking and financial reporting. These internal controls should be combined with detailed walkthrough flowcharts of the accounting system to help identify potential risks and improve operational efficiency.

Internal control procedures serve as the backbone of an organization's financial operations and provides the framework for:

• Risk mitigation: prevents errors, fraud, and misstatements in financial reporting and helps ensure compliance with DCAA and other regulatory requirements.
• Operational efficiency: reduces redundancies and streamlines processes.

Government contractors should aim to include the following internal control procedures:

Segregation of duties

• Guidelines that ensure no single individual has control over all aspects of a financial transaction.

Authorization and approvals

• Implement a process for approving transactions.
• Authorized personnel are provided access to certain areas within the accounting system through unique login information and role-based permissions.
• Audit trails / access logs are regularly reviewed.

Regular reconciliations and reviews

• Comparison of subledgers to the general ledger.
• Reviews and approvals of timesheets.
• Reconciliation of source documents to the accounting system.

Document retention and recordkeeping

• Maintain clear documentation for all transactions such as invoices, purchase orders, agreements, and timesheets.
• Regular internal audits are conducted to assess the effectiveness of internal controls and to verify compliance with applicable federal regulations.

Additionally, the use of walkthrough flowcharts of various processes within the accounting system should be developed and implemented. This helps map out key processes and shows the flow of information within the system. Government contractors should aim to identify critical processes, highlight control points, and regularly review and update their flowcharts to effectively manage risk within their accounting system.

Importance of Policies and Procedures

Accounting policies and procedures provide the framework for all business-related matters, offering clear guidelines and standardized processes to enhance financial transparency, accuracy, consistency, and reporting. These policies are crucial for government contractors to ensure compliance with federal regulations such as the FAR and other agency-specific requirements, thereby avoiding legal and financial repercussions. Standardized procedures promote consistent and accurate recording of financial transactions, which is essential for reliable financial reporting and smooth contract management and auditing. Well-documented policies ensure preparedness for audits by agencies like the Defense Contract Audit Agency (DCAA), providing clear evidence of compliance and proper financial management. Furthermore, effective accounting policies help identify and mitigate financial risks and prevent errors, fraud, and mismanagement, thus securing long-term operational stability. Streamlined processes also enhance operational efficiency, allowing employees to perform tasks more effectively and boosting overall productivity. Adhering to stringent accounting standards builds trust and credibility, which is vital for maintaining existing contracts and securing future opportunities.

Conclusion and Action Plan

For government contractors, maintaining robust accounting policies and procedures is not merely best practice but a necessity. These guidelines ensure compliance, accuracy, efficiency, and credibility, supporting the successful fulfillment of government contracts. Contractors are encouraged to take the following steps to ensure compliance:

• Conduct a policy review and assess existing accounting policies and procedures to identify gaps and areas for improvement.
• Ensure all policies align with current federal regulations and applicable contract clauses.
• Assess accounting system compliance against DCAA standards.
• Create policies that are clear, concise, and easily applicable.
• Provide employees with training sessions to ensure they understand and can effectively follow the established policies and procedures.
• Set up regular internal audits to ensure compliance with policies and procedures.
• Discuss with an advisor any additional policies and procedures your company should implement.Government contractors should note there may be additional policies and procedures your Company must maintain.

Our article series is not meant to be exhaustive. We highlight the most common policies and procedures. For additional information, expertise, or to discuss accounting policies and procedures templates, contact Ryan & Wetmore today.

Website Link: https://www.ryanandwetmore.com/insights/govcon-accounting-system-best-practices