By Ronald Marta, University of Houston PTAC
The offeror must have an approved accounting system
This is a phrase that is found with increasing frequency in government solicitations today.
What makes for an approved accounting system?
The basic requirements for an acceptable accounting system for government procurements are to be found in GSA SF 1408. The requirements are listed below. The notes are the author’s.
1. Is the accounting system in accord with Generally Accepted Accounting Principles applicable in the circumstances?
Note: Basic GAAP reporting principles include historical costs, objectivity, realization, matching, consistency, and full disclosure.
2. Accounting System provides for:
- Proper segregation of direct costs from indirect costs.
Note: Separation of direct and indirect costs is a major requirement of government costing. This requirement can be met by assigning separate numerical sequences to the cost groups. For example, direct costs could be 4xxxx; payroll overhead, 5xxxx; and G&A, 6xxxx.
- Identification and accumulation of direct costs by contract.
Note: A job cost ledger can be set up to satisfy this requirement. Also, job cost information can be very valuable for the business owner, for example, to know the amount of income realized on a particular job/contract.
- A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives.
Note: The best way to meet this requirement is to calculate indirect rates. The separation of direct and indirect costs from 2.a above makes this task very easy.
- Accumulation of costs under general ledger control.
Note: This is an indispensable requirement for any accounting system, be it in the government sector or in the commercial world.
- A timekeeping system that identifies employees’ labor by intermediate and final cost objectives.
Note: The system must be able to track labor costs from time cards to charges to a particular task/job/contract.
- A labor distribution system that identifies employees’ labor by intermediate or final cost objectives.
Note: This requirement is closely related to the preceding one. Labor distribution is concerned with the proper charging, usually via codes, of labor costs to tasks/jobs/contracts.
- Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account.
Note: The job cost ledger referenced in 2.b above will provide the information for this requirement.
- Exclusion from costs charged to government contracts of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions.
Note: This requirement can be met by assigning a separate numerical sequence to the unallowable costs. For example, unallowable costs could be 7xxxx.
- Identification of costs by contract line item and by units (as if each unit or line item were a separate contract) if required by the proposed contract.
Note: Not every contract will contain this requirement. If a particular contract does, the requirement can be met via the job cost ledger in 2.b above.
- Segregation of preproduction costs from production costs.
Note: This requirement applies mainly to manufacturing firms. The requirement can be met by assigning different numerical sequences to the two stages of production.
3. Accounting system provides financial information:
- Required by contract clauses concerning limitation of costs (FAR 52.232-20 and 21) or limitation on payments (FAR 52.216-16).
Note: If all the requirements in 2 above are met, the accounting system should provide all the financial information required by the two FAR clauses.
- Required to support requests for progress payments.
Note: Information from the job cost ledger from 2. b above should permit one to satisfy this requirement.
4. 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?
Note: As long as all the requirements in 2 above continue to be met, the data necessary for follow-on acquisitions should be readily available.
5. Is the accounting system currently in full operation?
Note: Whether the accounting system is in full operation will depend on the overall examination of the individual system, as well as the specific requirements in GSA SF 1408.
If the accounting system meets the requirements contained in GSA SF 1408, it is deemed acceptable for accumulating costs under a government contract.
Pricing Matters is a regular feature by Ronald Marta. Watch for future posts on a wide range of pricing issues.
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Ronald S. Marta has been a Senior Procurement Counselor with the University of Houston PTAC since 2008. Prior to that, he served as an auditor for 15 years with the Defense Contract Audit Agency (DCAA) and 7 years with the NASA Office of Inspector General at Johnson Space Center. His special areas of interest include accounting systems, proposal preparation, cost analysis, and audit preparation. Ron is a Certified Public Accountant and holds Master’s degrees in Business Administration and in Professional Accounting.
The UH PTAC is a specialty center of the University of Houston Small Business Development Center Network. UH PTAC provides government procurement consulting and training to 43 counties in Southeast Texas.
PTACs provide a wide range of government contracting help – most free of charge!
Assistance topics include (but are not limited to!):
- Determining Suitability for Contracting
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- SDB, 8(a), HUBzone and other certifications
- Researching Procurement Histories
- Identifying Bid Opportunities
- Proposal Preparation
- Contract Performance Issues
- Preparing for Audit