(Editor’s Note. In helping clients evaluate various accounting software, we have been happy to see that a few companies are expressly targeting their products to government contractors, providing features that are uniquely oriented to meeting government cost and pricing requirements (e.g. timekeeping, expense reports, incurred cost submittals, billing for cost type work, handling uncompensated overtime, forward pricing, etc.). Recently, we were approached by Wind2 Software, a firm that has been providing accounting software primarily for labor intensive (e.g. professional and non-professional labor services, construction firms) as opposed to manufacturing companies. They have recently developed a new accounting package that is explicitly oriented to meeting government accounting requirements and they asked our firm to evaluate how well their software meets these needs. Since they have spent a lot of time considering the needs of government contractors, we asked them to prepare an article for us that would highlight those aspects of accounting software that accounting and finance personnel at firms doing business with the government would (or should) be considering. Though the GCA REPORT and DIGEST does not endorse products we would recommend that government contractors who are considering various systems take a look at their accounting software. You can contact Wind2 at 800 779-4632 or look at their website at http://www.wind2.com.)
All accounting software should be evaluated according to its ability to accumulate and report accounting data that is consistent with generally accepted accounting principles, federal and state tax requirements and good project accounting (e.g. budgets, cost, staff utilization, profitability data). In addition firms who are seeking government business needs additional features. The contract accounting needs of the labor intensive firms working for the federal, state and local government are unique. Not only must project labor and direct expense be meticulously captured and reported at the cost objective level, but indirect expenses, which forms the foundation of allowable overhead charges on government work, must be aggregated in accordance with Federal Acquisition Regulations (FAR), certain Cost Accounting Standards (CAS), a variety of agency requirements, special contract requirements and DCAA guidelines. And that’s just for federal contracts – unique local and state cost accounting requirements are beginning to proliferate. Finally, just to verify that you are doing it all correctly, the system must provide a rock-solid foundation for the scrutiny of government audits and checks that may be performed throughout the life of each contract.
It is no easy matter for a government contract accounting system to meet all of these objectives and there are only a handful of specialized software systems that do. To help you make an informed decision when you purchase your first or next contract accounting system, this article presents the most notable attributes a system should provide.
The software vendor-customer relationship is a long term partnership. Be certain the vendor is committed to the success of that partnership. Do they specialize in serving the needs of the professional services firm and do they have a long track record of doing so? How large is their customer base? Will the vendor demonstrate their product in person and is the staff you interact with knowledgeable of your industry and government contract requirements? Check to see if the vendor maintains user groups in the area and if possible attend a meeting in advance of your purchase. And finally, and perhaps most important, how responsive is the vendor to your calls and requests during the evaluation period? Any lack of responsiveness at this time is a major cause for concern.
Support and Training. The success of your implementation and on-going use of the system will be integrally tied to the training and technical support resources provided by the vendor. Are the training services provided locally or must trainers be flown in at great expense? How much training does the vendor estimate for a successful implementation? What kind of on-going training opportunities (e.g. classroom seminars) are available and where are they located? What is the turnaround on calls placed with the support center? Does the vendor offer a self service support web site available 24/7 and how useful is the web site? Be certain the vendor can use the internet to tap directly into your application for web based problem solving. Check out the User Guides, which should be well organized, expertly written, and comprehensive with their contents available in the help system.
Maintenance. Software applications that serve the government contractor must evolve in response to changes in technology, government requirements and customer needs/preferences and program errors. The vendor must demonstrate prudent and timely response to all of these factors. They should offer a maintenance program with regularly scheduled updates. They should also have a track-record of seeking customer input regarding product enhancements and responding to that input in a responsible and timely manner.
Conversion. You probably have a lot of data in your current accounting system and it could be a real time saver to convert this data to your new system. The vendor should offer conversion services, with a variety of options regarding the type of data that will be converted.
The application should be Windows-based and compatible with the most recent versions of Windows 2000 and XP. Additionally, certain components of the system, like time and expense entry and report distribution, must be internet accessible using a web browser and standard dial up connection. Be cautious of the application that allows internet access to all of the system’s features, particularly sensitive accounting data. Security is a significant concern with this type of application. DOS is dead, so don’t even consider any DOS system, nor should you consider any aged DOS system that has simply been dressed up with a Windows interface. Finally, be certain that sensitive financial data is stored and managed in a database like Microsoft SQL. It offers numerous security and performance advantages over older file server-based systems.
Basically, the government wants to be assured that the direct and indirect costs a contractor bills the government are timely, accurate, and complete. In making this determination, the government (primarily its auditors) looks at a variety of factors including how a contractor enters direct costs, computes indirect cost, accumulates costs by cost objectives, ensures that costs are accurate and reconcile to other reports, prepares accurate billings and other reports that show incurred costs, generates and monitors indirect rates and screens unallowable costs. The system you choose must help the controller establish the proper accounting practices and generate required audit information as simply as possible.
Specific compliance-related features to look for in a government accounting system are presented in the following subsections.
1. Tracking Costs by Cost Objective
Since the government requires accumulation and reporting of costs by multiple cost objectives – contract, task order, delivery order, out-of-scope work, terminations – the system needs to provide flexibility in segregating the cost information for all conceivable cost objectives.
2. Time Keeping
Since labor is the major component of most contracts, the government has developed extensive requirements on what constitutes adequate timekeeping. To meet these requirements the system should:
1. Prevent changes from being made after the timesheet is submitted.
2. Limit changes only to employees, preventing others from changing records without the employee’s approval.
3. Maintain a log of all time record changes that includes who made the change when and for what purpose. Ensure the log is active even before posting.
4. Provide multiple approval levels (e.g., immediate supervisor, project supervisor, and program manager).
5. Provide security features and flexibility in who can and cannot access time records.
6. Allow electronic time recording from multiple locations such as corporate, branch offices and the field.
7. Allow electronic time entry by non-employees (e.g., subcontractors) and provide flexibility allowing non-employees to make charges as direct employees or ODCs without processing their time through payroll.
8. Assure that only approved cost objectives are charged.
9. Provide for time in/time out recording at various time intervals.
3. Labor Charging Controls
The charging of direct labor attracts the greatest audit scrutiny and government auditors closely monitor how well contractors maintain a variety of "labor distribution" reports. The system you choose must accurately capture and report labor costs, provide reports that identify hours to be assigned to contracts, demonstrate that labor time entered via timekeeping is consistent with labor hours and costs that are assigned to contract cost reports and the system can demonstrate a consistent and accurate flow of information between timekeeping, job costs, the general ledger, subsidiary ledgers and financial statements.
Ask the vendor to demonstrate a short "mock audit" that traces a sample of an employee’s labor hours and costs from timekeeping, reports that reconcile timekeeping data and job cost records and trace job cost records to the general ledger, to the profit and loss statement and to a variety of standard reports that meet the labor charging requirements of the government.
The system should also provide contractors the ability to handle uncompensated overtime in accordance with the government’s acceptable methods of accounting for it. For example, effective rates by payroll period should be computed and charged to contracts if the contractor chooses to follow that methodology.
4. Expense and Travel Reporting
Tracking employee expenses is also an important area for audit scrutiny with the objective of verifying that direct and associated indirect costs do not include unallowable costs. The system must allow expenses to be recorded in a manner consistent with IRS requirements, including the specification of destination, purpose of trip, travel companions, etc. The system should provide expense and travel reporting controls similar to those in timekeeping (e.g. limit access, log changes, provide for approvals). It should provide clear visibility of allowable and unallowable expenses so unallowable costs can be screened and charged to appropriate accounts but so employees can be reimbursed for all their expenses.
5. Identification of Indirect Labor and Cost Pools
The system should provide multiple setup options so indirect labor can be assigned to departments, cost centers, central service, service centers, and distinct projects (e.g. IR&D, B&P) as well as relevant indirect cost pools. The timekeeping feature must allow time tracking for each indirect cost category.
The system should accommodate the set up of an unlimited number of primary and intermediate cost pools for calculating indirect expense rates. It should be easy to enter adjustments to a cost pool (for example, to identify then exclude unallowable expenses) or to selected/all cost pools in one or multiple fiscal reporting periods. There should be a variety of methods available to adjust cost pools including constants, formulas, or general ledger account balances. Finally, for each cost pool the system should provide a supporting schedule for use in Incurred Cost Proposal submittals.
6. Indirect Rates
The system should let you assign labor costs to desired indirect cost groupings and accumulate non-labor costs into these groupings. The system should end the need to maintaining separate spreadsheet models that require tedious importation of cost and, instead, provide for automatic generation of indirect cost data and computation of indirect rates. Cost pools and bases must tie to general ledger balances. It should let you distribute totals of one pool to other pools, as well as distribute certain accounts to other pools. Once costs of both the pool and base are accumulated, the system should compute indirect cost rates. It must let contractors compute indirect cost rates in accordance with each company’s established practices and compute final indirect cost rates for closing out contracts and preparing incurred cost submittals.
The system should maintain an unlimited number of indirect cost rates and allow the associated bases to be established using general ledger accounts, allocations of one pool or individual/grouped accounts made to others, or year-to-date computations. It should generate numerous reports, incurred cost proposal schedules, and identify and adjust unallowable costs.
7. Cost of Money
Though interest costs are unallowable, you can bill the government for the cost of money following the Facilities Capital Cost of Money guidelines. The system you choose should automatically calculate the FCCOM at any cost center level in which the assets belong and provide accurate reporting such as the Facilities Capital Cost of Money Factors Computation report.
8. Actual and Provisional Rates
It should be easy to assign provisional rates to project charges as a percentage, per unit, or fixed amount. If the provisional rates change during the life of the contract, the system should allow you to track the starting and ending date or effective period for each rate. It should provide a comparison of the indirect expense rate to the provisional rate for reporting and analysis. The government’s requirement to monitor indirect rates throughout the year should be met by providing a standard worksheet that allows for automatic substitution of budget data with month ending actual data so annualized indirect rates can be computed. And finally, the application should automatically create a work in process transaction to record the difference between the actual and the provisional rate.
9. Project-Level Reporting
In addition to just good project profitability analyses, the government may impose a variety of project data requirements on specific contracts or task orders so the system needs to generate a multitude of project data reports. Estimate-to-complete computations, actual versus budget analyses on costs and time, project status, employee management and even project profitability reports. You should be able to customize these reports or create new reports from scratch. In addition, the system should be able to automatically generate required data (e.g. percentage of subcontract dollars to small disadvantaged businesses, training requirements met, etc.)
10. Billing
The system must accommodate a variety of contract types including Cost Type, Time and Material and Labor Dollar, Fixed Price, Fixed Unit Price and Other Transactions. For cost type contracts, for example, the system’s billing features should allow you to obtain cost data on all relevant cost objectives (e.g. contracts, task and delivery orders, subtasks, in-kind contributions) and establish "rate on rate" practices where preset indirect cost rates can be applied to multiple costs. It should provide numerous pre-billing reports for control purposes where current and total accumulated costs are identified, provide the ability to establish different indirect billing rates for different cost objectives (e.g. ceiling rates, desirable rates, etc.), provide the ability to change indirect billing rates when it appears that provisional indirect cost rates need to be modified and prevent billings that exceed authorized amounts or funding levels.
The system should provide billing formats that meet regulatory requirements (e.g.DD250, SF 1034 and 1035). Though it is impractical to expect a system to produce proforma formats for every conceivable billing circumstance, the system should provide proforma billings for cost type and T&M contracts that are sufficient for meeting most needs.
11. Screening unallowable costs
Though often insignificant in dollar amount, government agencies want contractors to adequately screen unallowable costs. The system you choose must help you identify unallowable costs at the time an expense is entered, assign it to the correct GL account, and then exclude it from billings, incurred cost submittals, forward pricing rates, etc.
The system should allow the set up of unallowable accounts to aggregate unallowable costs from timekeeping and expense forms, provide ready access to lists of all transactions in an account for scrubbing purposes and provide for percentage adjustments to specific accounts to eliminate only a portion of costs included in an account.
12. Incurred Cost Submissions
With the right system you should not have to prepare incurred cost proposals and submissions manually or using an offline spreadsheet. The system should automate this arduous, time consuming task.
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