The Basics of Government Contract Accounting

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Filed Under: Government Contracting Thought Leadership, Costing

Government Contract Accounting (GCA) is the maintenance of an organization's official financial books and accounting records, its policies, and procedures, all of which facilitate the tracking of, reporting on, and billing for, all costs, for any government contract, in accordance with the Federal Acquisition Regulation (FAR).  In order to meet DCAA compliance, it is necessary to meet the required federal government regulations defined by the FAR and  DCAA Cost Accounting Standards. These standards were developed to achieve consistency in the measurement and allocation of costs to Government contracts.

A compliant Government accounting system must do the following:

•  Be under general ledger control
•  Properly segregate direct and indirect costs
•  Ability to define and segregate allowable and unallowable costs.
•  Track labor to direct or indirect cost objectives
•  Costs are in accordance with Generally Accepted Accounting Principles (GAAP)
•  Accumulates direct costs by contract (job costing)
•  Labor system functions according to CAS standards for actual cost labor distribution and total time accounting if CAS is applicable
•  Logical and consistent allocation methods of indirect cost pools to intermediate and final cost objectives
•  Ability to record contract terms and flow down required contract clauses to subcontractors
•  All costs are reasonable, allocable to contracts, in accordance with generally accepted accounting principles (GAAP) and Cost Accounting Standards (CAS) if applicable.
•  Support interim and final indirect rates
•  Generate accurate and timely invoices

All costs are either labor or non labor, and all costs are either direct or indirect. A non-labor, direct cost is often referred to as an "ODC" - Other [than labor] Direct Cost.  Labor cost is usually the raw hourly wages paid for an employee's work.  Non labor cost represents all other costs, and generally consists of items ordered or subcontracted through Purchasing, and then paid for through Accounts Payable.  ODC is Other Direct Cost - ODC's include things like supplies, rent, computers, consultants, travel, etc. - costs that can be attributed to a single contract.

Direct Costs

Direct costs are those that can be attributed to one, and only one, project, or task, or program, or activity, or contract. The Federal Acquisition Regulation (FAR) calls these "final cost objectives." 

Per FAR 31.202 (a):   Direct costs of the contract shall be charged directly to the contract. All costs specifically identified with other final cost objectives of the contractor are direct costs of those cost objectives and are not to be charged to the contract directly or indirectly.

Indirect Costs

An Indirect cost is one that cannot be associated with one project but identified with two or more final cost objectives.    An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. It is not subject to treatment as a direct cost. 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.

Per FAR 31.203:

(b) After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to intermediate or two or more final cost objectives.

(c) The contractor shall accumulate indirect costs by logical cost groupings with due consideration of the reasons for incurring such costs.

Cost Pools
The grouping of indirect costs of similar type are referred to as a cost pool.  Government contractors will pool, or combine similar, homogeneous indirect costs and then allocate them in one lump sum to the projects (final cost objectives)  that benefit from the costs.   After this allocation has occurred, your project now has been assigned its total costs which are the direct and indirect costs.

In Government Contract Accounting (GCA), indirect costs are typically broken into five broad areas, homogeneous groups, where they are pooled, aggregated, and then allocated to projects (final cost objectives) . The five broad categories are:

Fringe Benefits - expenses, both statutory and optional, that are associated with employee welfare. Many companies group fringes as either statutory or company paid. The statutory would include those contributions mandated by the government - FICA, FUTA, SUTA, SUI and/or Workers' Compensation. The company paid, or optional, fringes would be the rest of the employee benefits - paid time off, health insurance premiums, 401(k) contributions, tuition reimbursements, etc.

Overhead - costs that are generally associated with the fairly direct support of two or more contracts. Overhead costs typically include facility rent, insurance, equipment depreciation, utilities, computers, communications, supervisory time, travel, etc. Some say that overhead costs are variable with the level of contract activity - they can be scaled up and down relatively quickly to meet project demand.

General & Administrative (G&A) - sometimes called "corporate" costs. These expenses are almost fixed in nature, in that they are quasi-independent of the number or size of contracts the company may have underway. G&A includes things like the accounting 2epartment, bank fees, shareholder relations, maybe a corporate HR department, the office of the president, legal costs, etc.

Material and/or Subcontractor Handling - costs associated with procuring material or subcontract work for a contract. Typical costs would include some charges by the Purchasing Department to place the order, the receiving dock, stockroom activities, inventorying, A/P, etc.

Service Center - costs that are collected and then allocated to other pools, or directly to contracts.  Examples include a Copy Center where costs are allocated or charged out based on the number of copies, or a Telephone service center where costs are allocated based on the number of handsets, or an HR Service Center that is allocated based on equivalent full-time headcount.

Cost of Money -   This is also called Facilities Capital Cost of Money (FCCM), or CAS-414 (Cost Accounting Standard, subsection 414). This is a way to increase the profits to government contractors who have significant amounts of capital invested in plant and equipment dedicated to government contracting.