1. NCMA Workshop Developing a Compliant Accounting System for
March 8, 2017
Developing a Compliant Accounting System for
Small Businesses
Peter Witts, CPA
© Copyright by Peter Witts CPA PC

2. Background Information
Former DCAA Auditor – Northeastern Region – June 1989-September 2000
Practicing CPA since September 2000, supporting the unique accounting needs of Government Contractors
Developed Indirect Expense Rates for proposals, billing and negotiated rates
Developed compliant accounting systems deemed adequate by the DCAA
Prepared Incurred Cost Submissions and Indirect Rate Proposals
Supported audits conducted by DCAA and DCMA
© Copyright by Peter Witts CPA PC

3. OBJECTIVE Provide and overview of developing
a compliant accounting system for
small businesses that will stand up to a
DCAA audit.
© Copyright by Peter Witts CPA PC

4. Fixed Priced Contracts-Progress Payments Based On Costs
Why are you required to have a Compliant Government Contract Accounting System?
Cost-Type Contracts
FAR Limitations
“(a) A cost reimbursement contract may be used only when –
(2) The contractor’s accounting system is adequate for determining costs applicable to the contract or order; and”
Fixed Priced Contracts-Progress Payments Based On Costs
FAR – Progress Payments
The Government will make progress payments to the contractor when requested as work progresses, but not more frequently than monthly amounts of $2,500 or more approved by the Contracting Officer,
Under the following conditions:
(f) Control of costs and property. The Contractor shall maintain an accounting system and controls adequate for the proper administration of this clause.”
© Copyright by Peter Witts CPA PC

5. Other Contract Types that Require Adequate Accounting Systems
Why are you required to have a Compliant Government Contract Accounting System?
Other Contract Types that Require Adequate Accounting Systems
Fixed Ceiling Price Contracts with Retroactive Price Redetermination (FAR (b))
Fixed Price Incentive Contracts
( (c)(1))
© Copyright by Peter Witts CPA PC

6. What is DFARS 252.242-7006 – Accounting System Administration?
DFARS Subpart – Contract Business Systems
DFARS – Accounting System Administration
This clause is incorporated into all DoD contracts that require an adequate accounting system.
The clause defines what is an “acceptable” system
The clause defines what is an “accounting system”
The clause defines the criteria for an accounting system (SF1408).
© Copyright by Peter Witts CPA PC

7. What is a Compliant Government Contracting Accounting System?
An accounting system that is acceptable for accumulating costs under a government contract that provides for the following areas defined in the SF 1408:
In accordance with the Generally Accepted Accounting Principles
Proper segregation of direct costs from indirect costs
Identification and accumulation of direct costs by contract
A logical and consistent method for the allocation of indirect costs
Accumulation of costs under the general ledger control
A timekeeping system that identifies employee’s labor by cost objectives
A labor distribution system that charges direct or indirect labor to cost objectives
Interim (at least monthly) determination of costs charged to a contract through routine posting of books
Exclusion from costs charged to the government of amounts which are not allowable in terms of FAR Part 31
Identification of costs by contract line item and by units if required by proposed contract.
Segregation of pre-production costs from production costs
© Copyright by Peter Witts CPA PC

8. In Accordance with Defining Accounting Period (CAS 406)
Accrual Based (Accrued Expenses, Accrued PTO, etc.) Matching Principle.
Capitalization and Depreciation (GAAP Based)
Cash Basis is not acceptable
© Copyright by Peter Witts CPA PC

9. Proper Segregation of Direct Costs from Indirect Costs
Developing a Chart of Accounts
Sample Account Number Structure
100 Series – Assets
200 Series – Liabilities
300 Series – Equity
400 Series – Revenue
500 Series – Direct Costs (Direct Labor, Direct Materials)
600 Series – Intermediate Cost Pools (Fringe, Occupancy, etc.)
700 Series – Overhead Cost Pools (Engineering, Manufacturing)
800 Series – G&A Cost Pools (Administrative, Marketing, IR&D, B&P)
900 Series – Other Income/Other Expenses
© Copyright by Peter Witts CPA PC

10. Proper Segregation of Direct Costs from Indirect Costs
Developing a Chart of Accounts
Sample Direct Account Structure
(Costs of Good Sold)
– Direct Labor
– Direct Material
– Direct Travel
– Other Direct Costs
© Copyright by Peter Witts CPA PC

11. Proper Segregation of Direct Costs from Indirect Costs
Sample Indirect Expense Account Structure
(Expense Pools)
– Fringe Benefits
– Vacation/PTO
– Occupancy Costs
– Rent Expense
– Engineering Overhead
– Indirect Labor
– G&A Expenses
– Accounting Services
© Copyright by Peter Witts CPA PC

12. Proper Segregation of Direct Costs from Indirect Costs
Develop a Policy & Procedure on Chart of Accounts
Account Number Structure
Definition of Type of Expenses or Costs that go into the Account
How a New Account is added to the Chart of Accounts
Who has the Authority to Modify the Chart of Accounts
© Copyright by Peter Witts CPA PC

13. Identification and Accumulation of Direct Costs by Contract
Job Cost Ledger
The system must identify Direct Costs by Cost Element by Project
The Job Cost Ledger must reconcile back to the control account (i.e. Direct Labor, Direct Material, etc. )
Distinct Job numbers for each Project
© Copyright by Peter Witts CPA PC

14. A Logical and Consistent Method for the Allocation of Indirect Costs
Indirect Expense Rate Calculations
Develop a Model or System to Calculate Indirect Expense Rates
Ties to Established Chart of Accounts
Shows Accounts that Make up Expense Pools
Shows Accounts that Make up the Allocation Base
Adjust for Unallowable Accounts
Develop a Policy for Procedure on Indirect Expense Rates
Document the Company’s Definition of a Direct & Indirect Cost
Document Intermediate Costs Pools and Allocation Method
Document the Expense Pools and types of Expenses that go into the Expense Pools
Document the Composition of Accounts that make up the Allocation Base for Indirect Expenses
© Copyright by Peter Witts CPA PC

15. Accumulation of Costs under General Ledger Control
Job Cost Ledgers need to Reconcile to Direct Accounts in the General Ledger
Subsidiary Ledgers of Accounts need to reconcile back to:
General Ledger Control Accounts
Expense Pools need to Reconcile to Indirect Expense Accounts in the General Ledger
© Copyright by Peter Witts CPA PC

16. Single Most Important Item in Designing Your Accounting System
A Timekeeping System that Identifies Employee’s Labor by Cost Objectives
Single Most Important Item in Designing Your Accounting System
Labor is usually the single largest cost driver for most contracts
Labor charging is one of the highest risks for contract fraud
Labor charging is one of the highest risks for employee errors
© Copyright by Peter Witts CPA PC

17. Critical Elements in designing your Timekeeping System
A Timekeeping System that Identifies Employee’s Labor by Cost Objectives
Critical Elements in designing your Timekeeping System
The Timecard (Paper vs. Electronic)
Policy and Procedure on Timekeeping
Employee Training
© Copyright by Peter Witts CPA PC

18. A Timekeeping System that Identifies Employee’s Labor by Cost Objectives
The Timecard (Paper)
Only one preprinted timecard is prepared per employee per period
The employee is in possession of the timecard
Employees prepare their timecards in ink, as work is performed
Timesheet is pre-coded with authorized project numbers
Employees record their time no less than daily
Corrections are make in ink, initialed and dated by employee and provide a relevant explanation
Employees and supervisors sign timesheets in accordance with procedures, verify and certify to accuracy
© Copyright by Peter Witts CPA PC

19. The Timecard (Electronic)
A Timekeeping System that Identifies Employee’s Labor by Cost Objectives
The Timecard (Electronic)
System generates a new timesheet for each recording period
The employee is the only person able to login into the timesheet
Once time is recorded by the employee the employee can only make the change to the timecard
Timesheet only allows for authorized project numbers
Employees record their time no less than daily
Corrections are tracked by system with date of change, reason for change, and who made the change
Employees sign timesheets electronically and time is locked for changes
Supervisors sign timesheets and cannot make changes to an employee’s timesheet
© Copyright by Peter Witts CPA PC

20. The Timecard (Electronic)
A Timekeeping System that Identifies Employee’s Labor by Cost Objectives
The Timecard (Electronic)
Software Solutions
eFAACT
Clockwise
Replicon
Unanet
© Copyright by Peter Witts CPA PC

21. Policy and Procedure for Timekeeping
A Timekeeping System that Identifies Employee’s Labor by Cost Objectives
Policy and Procedure for Timekeeping
Documents the Timekeeping Procedures for Company
Instructions for the Preparation of Timesheets
Instructions on how to correct Timesheet errors
Provides for the interval time to complete for labor activities
Completion and submission procedures for timesheets
Defines Employee Responsibilities for Timesheet Preparation
Defines Supervisor Responsibilities for Timesheet Preparation
© Copyright by Peter Witts CPA PC

22. A Timekeeping System that Identifies Employee’s Labor by Cost Objectives
Employee Training
All Employees keep a copy of the Company Policy at their Workstation
Employee Orientation require training and Sign-Off for New Employee
Quarterly Training or Reminders on Importance of Timekeeping
Conduct Periodic Labor Floor-checks and Document Results
© Copyright by Peter Witts CPA PC

23. A Labor Distribution System that charges Direct or Indirect Labor
to Cost Objectives
Allocates Labor based on Time Sheets for Payroll Period
Time Charges Reconcile to Individual Employee Timesheets
Payroll is Allocated and Reconciled to Direct and Indirect Charges of Employees
Direct Charges of Employees are further allocated by Projects
© Copyright by Peter Witts CPA PC

24. Record expenses and costs to the books of accounts at least monthly
Interim Determination of Costs Charged to a Contract through Routine Posting of Books
Record expenses and costs to the books of accounts at least monthly
© Copyright by Peter Witts CPA PC

25. Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31
Establish Specific Unallowable Accounts in the Chart of Accounts
Policy and Procedure on Accounting for Unallowable Costs
Training for Employees in FAR Part 31
© Copyright by Peter Witts CPA PC

26. Establish Expressly Unallowable Accounts in the Chart of Accounts
Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31
Establish Expressly Unallowable Accounts in the Chart of Accounts
809 – EXPRESSLY UNALLOWABLE ACCOUNTS
– UN-Indirect Labor
– UN-Advertising
– UN-Bad Debt Expense
– UN-Contributions
– UN-Entertainment
© Copyright by Peter Witts CPA PC

27. Policy and Procedure on Accounting for Unallowable Costs
Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31
Policy and Procedure on Accounting for Unallowable Costs
Defines what is an Unallowable Cost
Defines what is a “Directly Associated” Unallowable Cost
Establishes the Expressly Unallowable Costs in the Chart of Accounts
Defines how Direct Unallowable Costs are Handled
Provides for a Screening Process of Unallowable Costs
© Copyright by Peter Witts CPA PC

28. Training for Employees in FAR Part 31
Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31
Training for Employees in FAR Part 31
Trade Association Workshops and Meetings (NCMA, NDIA)
Internally developed Programs
Federal Publications Seminars
Public Contracting Institute
Outside Consultants
© Copyright by Peter Witts CPA PC

29. Identification of Costs by Contract Line Item and by Units if required by Proposed Contract
The system can provide for sub-projects
(i.e. CLINs, Task Orders, Sub-Tasks, etc.)
© Copyright by Peter Witts CPA PC

30. Segregation of Preproduction Costs from Production Costs
The system can segregate costs related to preproduction
Generally not seen at Small Businesses and R&D Contractors
© Copyright by Peter Witts CPA PC

31. Software Solutions QuickBooks Pro eFAACT (QuickBooks Integration)
Jamis
Microsoft Dynamics Solutions for GovCon
Unanet
Deltek CostPoint
DCAA does not Approve Software Packages
DCAA determines “Adequacy” of Company’s Accounting System
© Copyright by Peter Witts CPA PC

32. Best Practices Develop a Simple Accounting Manual
Only put into place Politics & Procedures you actually intend to use
Constant Training on Timekeeping Practices to Staff
When in Doubt: “Document the Reason”
Don’t create an overly complex Chart of Accounts
The Simpler the Better (Easy to Provide and Overview to DCAA)
© Copyright by Peter Witts CPA PC

33. Policies and Procedures
(Minimum)
Chart of Accounts
Job Costing
Direct vs. Indirect Costs – Indirect Expense Rates
Timekeeping
Government Billing Process
Accounting for Unallowable Costs
© Copyright by Peter Witts CPA PC

34. What to Expect during a DCAA Pre-Award Accounting System Survey
Entrance Conference (Introduction/Scope of Audit)
Request for Initial Information (Chart of Accounts, Manuals, P&P’s)
Fieldwork (Walk-Through and Demonstration of System) – 2-4 Hours
Follow-up Questions (Phone or )
Draft Audit Report (Ability to Respond to any Conditions/Corrective Action Plan)
Final Audit Report (Request Copy of Audit Report from ACO)
Follow-up Audit on Corrective Action Plan (if required)
© Copyright by Peter Witts CPA PC

35. Common DCAA Audit Findings
Not in Accordance with GAAP
No Policies and Procedures
No Timekeeping Process or Timecards
No Labor Distribution System
No Job Costing System
Chart of Account does not break out Direct vs. Indirect Costs
Unallowable Costs not identified in the Chart of Accounts
© Copyright by Peter Witts CPA PC

36. Reference Materials
SF 1408 – “Preaward Survey of Prospective Contractor Accounting System”
DCAAM – “DCAA Information for Contractors”
DCAA Audit Program for Accounting System
DCAA Audit Program for Preaward Survey of Prospective Contractor Accounting System
DCAA Audit Program for Post Award System Audit at Nonmajor Contractors
© Copyright by Peter Witts CPA PC

37. QUES TIONS Peter Witts, CPA pwitts@wittscpa.com (978) 957-9665 x102
© Copyright by Peter Witts CPA PC

38. Contact us to Schedule a Free Consultation.
Need Further Help?
Contact us to Schedule a Free Consultation.
Contact us at:
70 Wilbur Street, Unit 3
Lowell, MA 01851