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Government contractors are urged to switch from QuickBooks to a DCAA-compliant cost accounting system for improved efficiency, compliance, and seamless project management. OneLynk™ offers integrated solutions to streamline accounting, project management, and compliance, ensuring accurate financial reporting and reduced audit risks.
GovCons Switching from QuickBooks to a DCAA Compliant Cost Accounting System
As a government contractor, you'll have many growing pains! If you've been fortunate enough to win government grants or contracts ... it's time to put in place a DCAA-compliant project accounting system that will streamline operations while also improving compliance. Managing government grants, contracts and projects requires a robust set of processes and systems, including project management and accounting tools to handle the funding correctly and to comply with government reporting requirements. Your accounting system must track all the organization's costs and allow the cost to be separated by what is allowable (direct and indirect), and what is unallowable. Each grant or contract must be allocated a portion of the indirect costs. The accounting system must help you demonstrate that your indirect cost allocation methodology is fair and equitable and can withstand the scrutiny of a government audit. Your project management system must provide detailed job cost reports while supporting the entire project lifecycle including estimating, planning, executing (operating), and reporting. Supporting all these functions requires putting in place project cost accounting software.
AtWork Business Managed Services for Government Contractors
OneLynk provides the processes to achieve government compliance while offering subject matter experts
across functions like accounting, HR, finance, contract and project management.
across functions like accounting, HR, finance, contract and project management.
If your organization is like many small businesses, you've implemented standalone tools for accounting and project management. Standalone accounting software, such as QuickBooks, allow accountants to record and track project direct cost but can't provide the project team with timely job cost reports containing the allocated indirect cost, forcing you to put in place manual processes supported by spreadsheets. These spreadsheets may track important project information such as labor, expenses, and material charges but they don't provide the complete view because they don't show the fully burdened cost, they introduce the possibility for error and they also introduce costly and inefficient manual processes.
Accurate and timely job cost reports are essential to understanding the total cost of a grant or contract and for making decisions and reporting. The problem with standalone PM tools such as Microsoft Project is they were designed for project planning so they lack the project cost accounting features required to support the entire lifecycle. They don't support the ability to view project cost data in real-time which includes allocated indirect costs.
A key question, you should ask is: Have you outgrown the capabilities of accounting systems like QuickBooks? If your answer is yes, and you are planning to set up a DCAA-compliant accounting system ... continue to read. In this blog, we discuss the key benefits of setting up a DCAA-compliant project accounting system. We provide ten questions you need to ask and provide answers that will help explain what you should look for when switching from systems like QuickBooks to an integrated project accounting system.
1. Am I using spreadsheets and manual processes to complete the tasks required to run my company?
An important outcome when implementing a new compliant DCAA accounting system should be to eliminate manual tasks and spreadsheets, produce more accurate and timely financial data, improve internal controls, and pass a government compliance audit. You should compile a list of existing tasks that are currently being done manually and determine if your new accounting system will help you automate or eliminate them. Examples of manual tasks may include calculating indirect rates, generating labor distributions, calculating fully burdened job costs outside the system, and/or generating data to prepare for an audit.
2. Does my system allow me to support a system of internal controls, and can I comply with GAAP i.e. the accrual method of accounting?
Your new accounting system should be reviewed for compliance with GAAP guidelines and accrual-based accounting standards. Also, compliance with revenue recognition guidelines for contracts defined in ASC 606 is important when managing government grants and contracts.
3. What core capabilities will I require to be considered DCAA compliant?
The SF 1408 provides a list of the accounting requirements. They are summarized below:
- Accounting System provides for:
- Proper segregation of direct and indirect costs
- Identification and accumulation of direct costs by contract
- Method for allocation of indirect costs
- Have a written, practiced, and demonstrable timekeeping system or policy in place
- Show distribution of labor costs among accounts and jobs
- Segregation of unallowable costs
- Accumulation of costs under General Ledger control
- Issue reports periodically and on-demand
- Accounting System provides financial information
- Required by contract clauses concerning limitation of cost, funds) (FAR 52.232-20 and 22) or limitation of payments (FAR 52.216-16)
- Required to support requests for progress payments
- Is the accounting system designed to have reliable and accurate data?
- Can the accounting system efficiently manage the various types of government contracts, from T&M to Firm Fixed Price, and the most complex cost-reimbursable contracts?
You should determine if you are addressing each of these requirements as well as the effort expended using your current processes. An integrated compliant cost accounting system will greatly reduce the cost compared to a QuickBooks-centered solution.
Learn More: What Is the SF 1408 - What You Need to Know
4. Does my existing chart of account structure support the cost segregation requirements of government contracting?
Your chart of accounts cOA) is the list of accounts used to record your business's financial activity. The chart of accounts provides different groupings of assets, liabilities, income, and expenses. The first step in setting up a compliant accounting system is to structure your chart of accounts to separate your cost by what is allowable (direct and indirect) and what is unallowable. Unfortunately, many of the commercially available accounting systems do not have a standard chart of accounts for government contracting. You'll need to work with your accountant to define what is needed for your business. Some accounting software packages designed for government contracting provide pre-configure COAs. For each account, you set up a general ledger account that will be used to record transactions and update account balances. To facilitate indirect rate calculations, accounts need to be grouped to allow costs to flow into cost pools that make up your indirect cost. For example, cost pools for Fringe, Overhead, and G&A costs are all captured using a series of sub-accounts that can be rolled up to figure out the cost pool balance.
a. Will the COA need to be restructured?
Your monthly government invoicing and annual incurred cost submission are generated from detailed concise project cost reports. The chart of accounts forms the foundation for gathering all this information. When the government auditors arrive, your paperwork needs to document the expense incurred and provide the supporting documents to authenticate the transactions and approval process. Being audited is not storytelling time or a time to fumble around looking for answers.
b. Will I need to re-classify some of my organization's existing costs?
As you restructure your chart of accounts, you may have to re-classify some of your costs based on the new accounts that have been created.
Learn More: Basics of Indirect Rates - How to Calculate Them
5. Will I need to change any of my accounting operating procedures?
A new accounting system should support new ways of working including implementing workflows for eliminating manual tasks, automating approvals, and automating routine accounting tasks such as the accounting close.
a. How should my organization implement automated transaction approval?
With QuickBooks, there is no integrated workflow that allows you to define your process for approving transactions such as timesheets, expenses, and purchases. Any new accounting system should allow you to automate the approval of transactions as well as the processing and recording of the transactions in the project and general ledger. Appropriate reviews and approvals are required by DCAA.
b. How can I automate the calculation of indirect rates?
With QuickBooks, you may be manually calculating your indirect rates outside the accounting system, this can be time-consuming and error-prone. Any new accounting system should allow the calculation of rates to be done directly by the accounting system.
c. How do I perform a monthly and yearly accounting close?
With QuickBooks, you don't have to follow a formal month-end or accounting-period close process. When implementing a new accounting system, you want to explore how the accounting close can be automated to create timely and accurate financial reports. Many auditors are very leery when accounting systems do not provide for a formal closing process. Remember you want to be classified as low-risk!
6. How do I know if I have the right accounting and project staff in place?
Depending on the size (employees & revenue) of your company, you may require accounting resources with a range of skills, e.g., Bookkeeper, Accountant, Controller, or CFO to handle the accounting. You also need project managers with expertise in estimating, planning, and controlling projects. In addition, to project management skills this also requires cost accounting expertise. An important thing to explore when selecting someone to support your requirements does the resource have an extensive background in government accounting. They should be familiar with the requirements of the SF 1408, the pre-award survey, and the incurred cost submission (ICS) as well as understand what's required to generate and analyze job cost reports. With QuickBooks, there is no notion of roles for each of these resources nor controls to manage access to transactions and data.
7. What's the impact on other systems that I already have in place and are those systems compliant?
If you are managing government grants and contracts your company may be subject to an audit, it's important to understand what the auditors may be looking for. From a DCAA point of view, the data maintained in the timekeeping, payroll, and billing system must reconcile. Therefore, your accounting system must make it easy for the auditors to understand how transactions flow through your accounting system to ensure they're recorded accurately and reconcile with other systems like timekeeping, payroll, and billing.
a. What integration is required with the timekeeping system?
If you are managing government grants and contracts, timekeeping is mandatory. Your existing timekeeping system should record all labor activities for employees. Your timekeeping system should separate cost categories so that you have direct labor for government contracts, direct labor for commercial contracts, overhead for government contracts, and overhead for commercial contracts.
The timekeeping system must also be able to separate direct and indirect labor activities as well as vacation, sick, or other administrative leave. The accounting system must utilize the labor data to generate a labor distribution that summarizes the cost of each activity. To generate a labor distribution the accounting system needs to ensure employee details, compensation data, and payroll items are set up in the system.
b. What integration is required with the payroll system
There should be a payroll item for every kind of labor activity you have, including things like direct and indirect activities, paid time off, and holidays. You should also double-check that account mappings are correct, so that labor costs are posted to the right general ledger accounts. Once payroll has been processed the accounting system must allow the payroll data to be recorded correctly. Ideally, the process of recording the payroll in the accounting system should be automated.
c. What integration is required with the billing system?
All direct charges (labor, expenses, and purchases) posted in the General Ledger will be used to generate customer invoices. The accounting and billing system must allow direct project-related labor, expenses, and purchases to be reconciled with the invoices generated. The project ledger should be used to reconcile the customer invoices with the invoices data recorded in the general ledger.
An integrated compliant cost accounting system greatly reduces the risks and inefficiencies of a QuickBooks-centered solution.
Project Management Questions
8. Will implementing a new accounting system impact my project management practices, such as, how I generate project cost reports?
Your project management team needs to plan projects and produce timely job cost reports. They probably have put in place manual processes for tracking labor, expenses, and material charges using spreadsheets. The problem with the spreadsheets is they don't provide a complete view because they don't show the fully burdened cost and they introduce costly and inefficient manual processes. Ideally, you want your new accounting system and your project system to be integrated so that project-related transactions can be tracked and allocated indirect costs. The fully burdened cost should be used when generating the job cost reports.
Your new accounting system should incorporate workflows and document management to automate the validation and processing of project-related transactions. It should allow transactions to be submitted by employees and subcontractors at any time from anywhere. During data entry, any required documents should be allowed to be attached, and all transactions should be assigned an appropriate charge code to separate cost categories such as labor, expenses, and materials. Once submitted the charge code information must allow the transaction to be validated, approved, and recorded in the accounting system's project and general ledger.
a. How do we integrate the project management and accounting data and why do I need a separate project ledger?
The Project Ledger (PL) allows the project accounting system to process each transaction and generate the fully burdened cost in "near-real" time. This allows an early analysis of job costs using bid and/or target indirect rates before the close of the accounting period. An integrated project accounting system allows the project management team to create project plans that include defining the work breakdown structure (WBS), establishing project budgets, and assigning resources. Once the project plan is approved, the accounting team must assign charge codes that will be used to capture all the project-related costs. After charge codes have been assigned, the project team can begin to enter transactions. Once the transactions are approved, the integrated system should process each transaction by recording the cost and applying the indirect cost using both BID and TARGET indirect rates. This segregated cost is recorded in the PL. The PL is updated with the ACTUAL and FORECAST segregated cost after the accounting period is closed.
General Ledger (GL) is a critical component used to support the organization's accounting cycle. Each account defined in the Chart of Accounts represents a GL ledger account. The ledger accounts are used to record the financial impact of all transactions including those that are project related. The design of GL must follow the Federal Acquisition Regulations (FAR) incurred cost submission, or "ICE Model", which is a universal requirement for all federal government contractor businesses holding cost-type or time and materials contracts, regardless of agency customer. Its function is to determine the final indirect cost rates that a contractor incurred during the fiscal year.
b. What is fully burdened cost and how will it help better manage my projects and why is this required?
The accounting system must compute indirect rates and when transactions, such as timesheets, expense reports, and vendor invoices are approved, the indirect rates should be applied to compute the segregated cost. The segregated cost data consisting of the direct labor, fringe, overhead, G&A, and any applicable M&H cost is stored in a sub-ledger such as a Project Ledger (PL). The integrated project accounting system uses the PL data to provide project status reports (PSRs) using at least target and actual. In addition, the system should support generating job cost reports using bid and forecast indirect rates. These reports will allow you to conduct variance analysis to ensure that your planned cost and actual cost are in sync If they are not, a corrective action plan must be put in place to address cost overruns.
9. Can I purchase a DCAA-compliant commercial off-the-shelf cOTS) accounting software package?
There is no such thing as a COTS-based DCAA-approved government accounting software package. An accounting system is more than just a software package. It includes accounting methods, procedures, and controls. Many accounting software applications can be part of an acceptable accounting system or set up in a manner that fails to meet the requirements of an acceptable system. What is critical to achieving compliance is how the accounting system is set up to comply with the requirements defined in SF 1408. Learn more: What is the SF 1408 - What You Need to Know.
a. What is the impact of preparing the incurred cost submission report?
Your project management and accounting system should generate project cost reports that help you monitor your indirect rates and aid in preparing the detailed schedules provided in the incurred cost submission (ICS) report. And because ICS submissions are cumulative, the accounting system should keep the historical billing data organized and easily accessible-you'll need it to show the government what was billed in prior years.
The accounting system should be set up and maintained in the right way to capture all the necessary data. An accounting system should have the ability to track billings and project costs in accordance with indirect rates. Costs must be assigned to the right buckets-typical cost pools might be direct labor, fringe benefits, overhead (OH), general and administrative (G&A), and material handling (M&H).
Ideally, the accounting systems should have built-in ICS capabilities that help facilitate the capture of information needed to generate the ICS.
b. How will the new system help reduce the risk of audit findings?
The accounting system must help you demonstrate that your indirect cost allocation methodology is fair and equitable. Allocability is the catch-all in the DCAA audit toolbox that quite simply means a cost is assigned (allocated) to a final cost objective based on a causal or beneficial relationship. The subjective nature of this determination frequently leads to audit issues. Have a system that fully tracks your costs and or adjustments and be fair and consistent in your methodologies.
Benefits of Integrated System
10. What benefits should be expected from implementing an integrated accounting and project system?
If your organization has implemented a standalone project planning tool such as Microsoft Project or a standalone accounting system such as QuickBooks consider the benefits of implementing an integrated project accounting system, including:
- Ability to produce "near-real" time profit/loss statements for all government contract types
- The ability of project teams to create a detailed WBS required to manage the grant or contract
- Eliminates the need for manual spreadsheets to track project-related transaction costs, such as labor, travel, training, or material purchases
- Eliminates the need for manually calculating fully burdened and segregated cost
- Enables more accurate and timely customer billing and supporting documentation
- Eliminates costly re-work due to posting cost to the wrong grant or project
- Ability to view project costs using BID, ACTUAL, TARGET & FORECAST rates
- Ability to control employees' and subs' authorization of charge codes which eliminates overruns
- Ability to quickly generate the Incurred Cost Submission report
- Ability to view project cost data using actuals and commitments
- Ability to support cost-reimbursable contracts and grants
- Simplifies user support by having only one single provider to go to for resolving problems or requesting help
Learn More About AtWork Systems
AtWork Systems' OneLynk platform, provides an integrated suite of tools you'll need to address the accounting and project management requirements for managing government grants and contracts. OneLynk supports all of the integrated projects and costs accounting capabilities described above, some uniquely available in our system. As the GovCon industry's most DCAA compliant ERP system, OneLynk, was built from the ground up to support project accounting and the ICE Model. OneLynk provides information that contractors need to prepare accurate and timely job cost reports as well as the incurred cost submissions (ICS). The integrated project and general ledger generate the list of required schedules for the ICS using data directly from the accounting system. Both the general ledger and project ledger have been optimized to support the project accounting and the ICS submission.
Learn More about ERP Solutions for Government Contractors: Implement a DCAA compliant ERP Solution for your GovCon.