In our many years of supporting government contractors, we have noticed some common misconceptions amongst businesses that get in the way of FAR compliance.
There are significant consequences if your business fails a DCAA audit. You could miss out on a prospective contract and forego future income; payment could be delayed and cause cash flow problems; you could be penalized with fines; in extreme cases, criminal charges could also be filed.
So, we would like to throw out the following common misconceptions and help you better understand FAR compliance.
1. DCAA audits focus on accounting software only
Many business owners are of the view that if their accounting software fulfills DCAA audit requirements, then their company is compliant.
While having the right accounting software is integral to DCAA audit compliance, auditors will examine other business systems and processes too.
DCAA’s objective is to protect taxpayer money, and this leads to significant focus around costs — how they are classified, segregated, allocated, reported and billed — in order to reduce the risk of fraudulent, excessive or incorrect charges to the government. But high costs such as labor involve recording hours on timesheets, with costs determined and accumulated in an accounting system, then invoiced through a billing system. This means the auditor must focus on timekeeping and billing systems, as well as your labor distribution process, if they’re to fulfill their audit objective.
2. Passing a DCAA audit just means setting up systems correctly
Some business owners believe as long as their systems are set up correctly, they will meet DCAA audit requirements.
However, DCAA FAR compliance goes beyond having the right chart of accounts or an automated timekeeping system. It’s not about buying and implementing “DCAA-approved accounting software” either. In fact, this kind of software doesn’t exist,; it is not the software package that is compliant, it is the implementation and functioning of the system that is compliant.
What you’re also required to have, in addition to compliant systems, are policies, processes, and controls to support them.
If we use timekeeping as an example, then you need software (or another method) to record labor hours. But you should also have written policies around how time should be recorded, processes to embed your policies, and controls (like a floor check) to ensure rules are being followed.
3. I can request a pre-award review or audit for my business
Businesses that intend to submit a contract cost proposal to a government agency, or have recently done so, might want to be proactive about FAR compliance by requesting an audit of their accounting system. However, a contractor cannot request an audit to be performed — only the contracting officer can initiate an audit.
Similarly, you cannot get DCAA to audit your rates when you’re bidding on a government contract.
4. Costs can be charged as overhead if they can’t be billed another way
Although indirect costs cover a wide variety of cost categories, and businesses can indeed have hundreds of them, there are FAR rules to ensure businesses claim only certain kinds of expenses as indirect costs.
Since FAR requires a “logical and consistent” method for accumulating and allocating indirect costs to contracts, you need to demonstrate uniformity by accounting for comparable items in the same way. It follows you cannot claim a specific cost as an overhead unless you can show that all or most contracts that incur similar costs are coded as overheads.
Getting indirect costs right is critical from a FAR compliance perspective, but it also affects your price competitiveness against other contractors when bidding for new work.
When you submit a proposed budget for a government contract, you’ll likely need to provide an estimate of direct costs, as well as an indirect rate that accurately reflects your indirect costs. An indirect rate is simply your total indirect costs divided by an allocation base.
5. All advertising and public relations costs are unallowable
Advertising is about using media to promote sale of products or services, while public relations aims to promote or maintain a company’s image.
Although many outgoings related to these areas are deemed unallowable in FAR Part 31.205-1, this section also lays out some exceptions.
A general rule of thumb is that if the cost is required by the contract or benefits the government agency, then it is likely to be allowable. If it relates to the contractor mainly, then it is likely to be unallowable.
Consider the concept of business development as opposed to advertising in relation to trade shows. Generic trade show advertising to the general public benefits the contractor and would likely be unallowable. However, if you have a targeted company you want to bid for contracts with because you can create synergies together, then that benefits the government and is therefore a real indirect cost to claim.
Another type of advertising that could be allowable relates to recruitment. If you’re creating job ads to hire the labor you need to support your contracts, then the related advertising costs can be claimed.
FAR Part 31.205-1 lists out a number of allowable public relations costs too. A couple of examples include the costs of responding to inquiries on company policies or activities and communicating with the public.
6. Playing it safe is best
The impact of this final misconception isn’t so much that it’ll get in the way of FAR compliance — it’s more about how it adds to the cost of compliance.
Due to the voluminous technical information surrounding costs — direct, indirect and unallowable — contractors often end up taking the “safe” approach by assuming that all costs that fall into a grey area, such as advertising and PR costs discussed above, are unallowable.
However, if you’re not claiming allowable items in your indirect costs, then you’re underestimating your indirect rates. This means you can’t recoup them from the government, and it ultimately decreases your profit.
This is where getting external advice can be beneficial. Our industry experts at Warren Averett understand how challenging audit compliance can be for small contractors. So whether you would like assistance on determining and allocating indirect costs, to check for potential FAR compliance issues, or gain insight on the competitive landscape, our team of experienced advisors can help.