1. Government Cost Accounting Survival Guide An introduction to the critical accounting practices needed for working on SBIRs and other government- funded contracts Thursday, May 17th 12:00pm – 1:30pm EDT Organized byHosted by

2. Workshop Presenter Workshop Presenter David M. Shelby Innovation Resources, LLC Kurz Purdue Technology Center 1281 Win Hentschel Blvd. West Lafayette, IN 47906 Former CFO/VP Business Operations Griffin Analytical Technologies, LLC (FLIR Systems) 2

3. Why do Government Contracts? R&D contracts provide non-dilutive financing for your business R&D funding provides a revenue stream to cover uncertainties in sales cycles R&D contracts lead to product validation 3

4. Why do Government Cost Accounting? Funding requirement for commercial firms performing R&D contracts or grants Eligibility requirement for commercial firms posting their services or products on the Federal Supply Schedule (FSS) 4

5. Okay, I know I need to do it… 5

6. This Seminar is for Entrepreneurs Part 1: The Landscape of government contracting Who, what, when, where Links to almost everything Part 2: Government requirements Part 3: Your Accounting System 6

7. The Government Contracting Landscape Part 1 7 David Shelby at the Grand Canyon A landscape with multiple cliffs and pitfalls

8. The Landscape… 8 It is all about compliance… Here are the players: Central Contractor Registration (CCR) is the primary registrant database for the U.S. federal government. CCR collects, validates, stores, and disseminates data in support of agency acquisition missions, including federal agency contract and assistance awards. Dun & Bradstreet (D&B) provides a D-U-N-S Number, a unique nine digit identification number, for each physical location of your business.

9. Landscape… CCR – set up your MPIN 9 A Marketing Partner ID Number (MPIN) is a personal code that allows you to access other government applications Past Performance Information Retrieval System (PPIRS) Online Representations and Certifications Application (ORCA) The MPIN is a mandatory data element created by the CCR registrant

10. Landscape… CCR – Get your CAGE Code 10 Your company will be assigned a CAGE Code during the processing of your registration. Notification of the activation of your CCR registration will be sent via email to the CCR Primary and Alternate Points of Contact.

11. Landscape … 11 Online Representations and Certifications Application (ORCA) Certificate of Independent Price Determination. Certification and Disclosure Regarding Payments to Influence Certain Federal Transactions. Taxpayer Identification. Women-Owned Business (Other Than Small Business). Prohibition on Contracting with Inverted Domestic CorporationsRepresentation. Certification Regarding Responsibility Matters. Place of PerformanceSealed Bidding. Place of Performance. Small Business Program Equal Low Bids. Small Disadvantaged Business Status (Basic & Alternate I). Certification Regarding Knowledge of Child Labor for Listed End Products. Previous Contracts and Compliance Reports. Affirmative Action Compliance. Compliance with Veterans Employment Reporting Requirements. Exemption from Application of the Service Contract Act to Contracts for Maintenance, Calibration, or Repair of Certain Equipment Certification. Exemption from Application of the Service Contract Act to Contracts for Certain ServicesCertification. Biobased Product Certification. Recovered Material Certification. Estimate of Percentage of Recovered Material Content for EPA-Designated Items (Alternate I only). Buy American Act Certificate. Buy American ActFree Trade AgreementsIsraeli Trade Act Certificate (Basic, Alternates I, II, and III). Trade Agreements Certificate. Prohibition on Conducting Restricted Business Operations in SudanCertification. Prohibition on Contracting with Entities Engaging in Sanctioned Activities Relating to Iran. Historically Black College or University and Minority Institution Representation. Royalty Information Representation of Limited Rights Data and Restricted Computer Software.

12. Landscape … 12 New in 2012 Will provide a new, one site interface for CCR, ORCA, and business opportunities starting Mid-2012

13. Landscape … 13 Useful and helpful Sites for Entrepreneurs

14. Landscape … 14 The Defense Contract Management Agency (DCMA) is the Department of Defense (DoD) component that works directly with Defense suppliers to help ensure that DoD, Federal, and allied government supplies and services are delivered on time, at projected cost, and meet all performance requirements Facility or operational capabilities reviews Deliverables on contracts Closing out contracts Tracking and monitoring of government owned property

15. Landscape … 15 And you want to get paid too? Wide Area Workflow (WAWF) is a secure web based system for electronic invoicing, receipt, and acceptance. WAWF allows government vendors to submit and track invoices and receipt/acceptance documents over the web and allows government personnel to process those invoices in a real-time, paperless environment.

16. Landscape … 16 Our friendly, Defense Contract Auditing Agency

17. Landscape … 17 Not for you…

18. Landscape … 18 THIS is for you…

19. Landscape … 19 Indianapolis Chapter of National Contract Management Association

20. Landscape … 20 Indianapolis Chapter of National Contract Management Association Bob Grimms company

21. Part 2. Government Accounting Requirements 21

22. Federal Acquisition Regulations-FAR 22 Lets focus on a few key accounting sections… Subpart 31.2 Contracts with Commercial Organizations

23. The Government Pays for Total CostsWhat is that? Direct Costs Costs which are specifically incurred to a grant or contract Materials, Labor, Subcontract, Equipment, Travel, ODCs Indirect costs Overhead costs that are proportionally allocated fairly to your grant or contract Such as Facilities, Sales, General & Administrative costs, But all costs must be allowable! 23 FAR 31.201-1 Composition of total cost

24. What are Allowable Costs ? Must be all of these: Reasonableness (The subjective catch-all) Allocability (How do these costs relate to the project at hand?) Contractual Terms (Your contract may also define allowable costs) 24 FAR 31.201-2 Determining allowability

25. What are Unallowable Costs ? 25 Costs that the Government will not pay for. Expressly unallowable cost means a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable. FAR 31.201-6 Accounting for unallowable costs

26. Unallowable Cost List Advertising Airfare Travel Costs in excess of the lowest available option Alcohol Automobile Costs for Personal Use Bad Debts Contingencies Contributions and donations Costs of promotional items Debt Service Deferred R&D Dividends Donations and contributions Entertainment Executive Salaries in excess Finance Leases Fines and penalties Gifts Goodwill 26

27. Unallowable Cost List, (Cont.) Hotel in excess of per diem Idle or excess facilities Interest and other financial costs Legal costs incurred to defend or pursue a claim with the government Lobbying Losses on other contracts Meals in excess of per diem Memberships in social, dining or country clubs Organizational Costs Penalties or incurred due to mischarging the government Personal Housing and Living Expenses Plant reconversion costs Public Relations Recreation Costs Research and development expenses in excess of reasonable 27

28. Unallowable Cost List, (Cont.) 28 Allowable per diem costs

29. Unallowable really means: Unbillable Just because these are called unallowable does not mean you will not incur these costs. It just means you must segregate them from your allowable expenses and dont bill the government for them. 29

30. The Unallowable Pitfalls If you are an SBIR company you must be very careful incurring unallowable expenses because they normally result in losses. 30

31. The Unallowable Pitfalls Not all agencies allow the same costs NSF does not allow Internal R&D NIH does not allow Internal R&D 31

32. Timekeeping 32 Information found in Section 2-302 Labor Charging System

33. Timekeeping You must have a written policy All employees made aware Record time daily Record all time worked Use timecard in Ink, or electronic system Sign timecard at end of each work period Supervisors to sign and approve Nature of work, not available funding 33

34. Timekeeping DCAA auditors perform floor checks Penalties for labor mischarging Criminal charges Employees Supervisors Managers and Officers 34

35. DCAA Pre-award Survey DCAA may be requested to evaluate the Contractor's financial capability to perform the contract Contractors adequacy of the accounting system to accumulate the type of cost information required by the contract 35

36. DCAA Financial Survey May be post award, but they cover: (1) Financial statements, including those contained in reports issued to stockholders, lending institutions, and SEC filings (2) Cash flow forecasts (3) Loan agreements and evidence showing compliance with these agreements, (4) Aging of accounts receivable and payable (5) Financial history of the contractor and affiliated concerns (6) Employee payroll tax returns (Federal) 36

37. Accounting System Survey 37 A Plug from DCAA….

38. Accounting System Survey 38 DCAA Systems Audit Affirmation Requirements Segregation of direct from indirect costs Accumulation of direct costs by contract Consistent method for allocation of indirect costs to final cost objective Accumulation of costs under general ledger control Timekeeping system that identifies labor to cost objective (contract)

39. Accounting System Survey 39 DCAA Systems Audit (Continued) Labor distribution system that charges direct and indirect labor to the appropriate cost objective Monthly determination of contract costs Exclusion of unallowable (FAR 31) costs Identification of costs by contract line item Segregation of preproduction from production costs System provides for consistency for follow on purchases

40. Qualifying Accounting Software Quickbooks Pro can work with a lot of spreadsheet work…(Repeat, a lot of spreadsheet work) Deltek Costpoint 7 Software for government contractors Microsoft Dynamics NAV for Government Contractors Recommended by Innovation Resources, LLC 40

41. Incurred Cost Proposal (ICE) Annual requirement for Cost Plus Fixed Fee type contracts Proposal proposes your final actual costs of overheads and billings May not be reviewed by the government for two or three years Your financial statement notes should indicate the contingency Get help 41

42. Part 3. Your Accounting System 42 10 May 2011 Yves Rossy - also known as Jetman

43. AccountingSegregation of Direct and Indirect Costs A quiz…. (Which are the following?) 1. Materials for deliverable 2. Design/CAD consultant 3. Travel to demonstrate the gizmo you were contracted to develop 4. Engineering labor 5. Sales call expense 6. Metro Expense on your way to the congressional office 7. Commissions on sales 8. Administrative staff salary 9. Lab space rental 43

44. AccountingSegregation of Direct and Indirect Costs A quiz…. (Which are the following?) 1. Materials for deliverable (direct costs) 2. Design/CAD consultant (direct cost, unless it is for IRAD) 3. Travel to demonstrate the gizmo you were contracted to develop (direct cost if demonstration is a requirement) 4. Engineering labor (direct cost, unless it is for IRAD) 5. Sales call expense (indirect cost, unless alcohol is involved) 6. Metro Expense on your way to the congressional office (Unallowable Cost) 7. Commissions on sales (indirect) 8. Administrative staff salary (indirect) 9. Lab space rental (indirect) 44

45. AccountingChart of Accounts A Chart of Accounts (COA) is a set of post office boxes in an accounting system where costs, revenues, assets, liabilities, and equities are accumulated 45

46. AccountingChart of Accounts General Groupings Assets Liabilities Equities Revenues Costs of Goods Sold Expenditures 46

47. AccountingChart of Accounts Revenues Must be able to designate to specific Job or Contract Must separate government contract revenues from Product Sales Service Revenues Other Revenues 47

48. AccountingChart of Accounts Costs of Goods Sold Must be able to designate to specific Job or Contract Must separate government contract COGS from Product COGS Service COGS Other COGS 48

49. AccountingChart of Accounts Expenditures Fringe Expenses (allocated) Facilities Expenses (allocated) General and Administrative Sales and Marketing Bid and Proposal Internal R&D Unallowable Expenditures 49

50. AccountingChart of Accounts A sample chart of accounts is provided as a download from the Indiana Defense Technology Council Website 50

51. Accounting Overhead Rates What are allocated expenses? What are pools? What are bases? 51

52. Allocated Expenses Allocated expenses is a cost accounting term The general idea is to take a group (pool) of similar expenses and fairly distribute them proportionately over a grouping of other expenses (a base) For example, Fringe Benefits… 52

53. Fringe Benefits Allocation Example Pool of Fringe Benefits Expense Employer paid health care insurance State and Federal Unemployment Social Security paid by company Vacation accrual Holiday time 53

54. Fringe Benefits Allocation Example 54 Base expense for allocation is total labor Labor COGS Sales Labor G&A Labor Unallowable Labor Total Labor Cost

55. Fringe Benefits Allocation Example Fringe Pool--$4,500 Fringe Base--Total Labor $14,062 Fringe Rate = Pool/Base 32%=$4,500/$14,062 Fringe Rate is 32% 55

56. Fringe Benefits Allocation Example So, now lets apply this to a Billable… Billable Monthly Contract Direct Labor $5,450 X Fringe Rate 32% Billable Fringe $1,744 56

57. Common Allocated Cost Pools Labor Overhead pool (Base: All labor) Facility cost pool Fringe pool Material handling cost pool (Base: Materials Purchased) Manufacturing overhead pool (Base: Product Direct Costs) General and Administrative pool (Base: Total Input Costs) Finance, accounting, legal costs Corporate pushdown costs Sales and marketing pool (Base: Same as G&A) Bid and Proposal pool (Base: Same as G&A) Internal research and development pool (Base: Same as G&A) 57

58. Proposal Pitfalls Many companies propose their PHASE II SBIRs without adequately forecasting costs other than the direct costs of the project. 58

59. Questions? 59

60. Supplemental Slides 60

61. Innovation Resources Back Office Fully GAAP (Generally Accepted Accounting Principles) compliant system Multiple project accounting system Purchase Order, receiving, voucher/invoice management, accounts receivable processing Check preparation (no signature authority) Monthly billing and invoicing Monthly reporting Basic accounting policy templates for agency audit purposes Employee payroll is supported through APS, Lafayette, Indiana, or other third party Income Tax Filings are supported through your CPA tax advisor Services may be provided on either Microsoft Nav or Quickbooks Pro 61 Basic accounting services (for companies not requiring full Department of Defense compliant systems)

62. Innovation Resources Back Office Microsoft Nav for Government Accounting platform DOD, DHS, NIH, and NSF Compliant system Fully independent, isolated virtual server with redundant live backup Indirect costs rates tracking Fringe Rate Facilities Rate G&A Rate DCAA/DCMA audit support Funding agency audit support Annual Incurred Cost Proposal Preparation Indirect costs rates tracking for provisional, actual, forecasted Annual Budget setup and monthly comparisons Complete and customized internal operating policies Secure internet timekeeping and purchase requisition access 62 Department of Defense add-on features (not included in above basic accounting services)

63. Innovation Resources Back Office Proposal review assistance Proposal budget prep Proposal commercialization plan Business financial plan Driver-based budget and forecasting, multi-year, by month on MS Excel platform Contracting Officer negotiations Board meeting financial preparations and presentations Capital structure and funding advisory General business planning and advisory 63 Consulting resources provided at hourly billing rate

64. David M. Shelby, MBABrief Bio FLIR Systems (Legal Entity: Griffin Analytical Technologies, LLC, an Indiana Limited Liability Company) Feb 2003 – Jan 2010 Role: VP Finance and Business Operations (CFO, Griffin Analytical Technologies, LLC) Managed Series A financial capital rounds Provided all forecasting and Accounting Transitioned the company through QuickBooks to a full MRP/ERP accounting system: Made-to-Manage Managed due diligence merger activities at Griffin for Acquiring company Managed Human Resources, grew company to 50 employees Managed Government Program contract revenues in excess of $5.75M per year Managed outsource contracting for contracting Served as business unit financial operations manager Assisted with strategy and execution of product development and commercialization, bringing five mass-spectrometer products to market David Shelby (Business Operations and Finance Consultant) Jan 2000-Jan 2003 Served in multiple roles for small businesses: CFO of Seed Company, General Manager startup optics company, Business operations advisor Product assessments, finance plans Old National Bank (Merger from The Citizens State Bank) 1990- Jan 2000 Senior VP, Commercial Lending Officer Managed Branch loan Portfolio in Commercial, Real Estate, and Personal loans Trust Officer Commodity lending specialist Managed portfolio with <1% loss over course of a decade of lending SBA loan program specialist Education: MBA, Indiana Wesleyan University, 1996 (Outstanding Professional Award) B.S., Economics, Purdue University, West Lafayette, Indiana 64