Pre-Award Survey Failures

As a government contractor, you are all too familiar with the importance of being compliant. One of the many requirements, you face is to have an accounting system that complies with Federal Acquisition Regulation (FAR). This is especially true if you want to bid on cost reimbursable or T&M contracts. How do you determine if your system is compliant though? Passing a pre-award survey indicates that your accounting system is compliant.

What is a Pre-Award Survey

The pre-award accounting system survey or audit (pre-award survey) evaluates a prospective government contractor’s accounting system. It determines if an accounting system can adequately accumulate contract costs. The survey uses the Standard Form (SF) 1408 for the assessment. To pass the survey, all the questions on the SF 1408 must have YES responses. If there are any NO responses, this indicates that there is a deficiency in your accounting system. Failing a pre-award survey can halt your progress on a contract.

Passing the pre-award survey is important. One of the first steps to passing is having the knowledge of what not to do. Below are five of the most common causes of pre-award survey failures.

GAAP Financial Reporting

The first question on the SF 1408 asks if the accounting system is in accordance with generally accepted accounting principles (GAAP). Essentially, to have a compliant accounting system a contractor must use the accrual basis of accounting. Many contractors prefer to use the cash basis of accounting because it is easier. However, accrual basis accounting accrues expenses as a contractor incurs them. This is important because it helps to stabilize indirect costs rates throughout the fiscal year. Ultimately, helping to better manage over-billings of the government.

Labor Distribution

Labor allocation is another common cause of a pre-award survey failure. Over billings are a major concern of the government. It is important that contractors record all their, and their employees, work hours. This includes hours on contracts and non-contracts, as well as during hours outside the normal workday. Not recording all hours can cause over billings on indirect rates.

Segregation of Costs

Segregating of costs is imperative to passing a pre-award survey. It is so important that the FAR has an entire section about contract cost principles and procedures. Also, there are multiple questions on the SF 1408 that surround this topic. One specifically asking if the accounting system provides for ‘proper segregation of direct costs from indirect costs.’

Contractors usually have no problem delineating between direct and indirect costs. However, segregating indirect costs seems to be more difficult. It is important to classify these costs regarding their ‘cost benefit analysis.’ Costs that benefit multiple contracts should be overhead, whereas costs that exist without contracts should be G&A.

The segregation of unallowable expenses is important as well. Costs that do not meet the criteria of FAR 31 are unallowable. Contractors cannot bill the government for these costs and must exclude them. Excluding these costs reduces the billings of indirect costs to the government.

Indirect Cost Rates

Government contractors must be able to determine and monitor their indirect cost rates regularly. Monitoring indirect cost rates ensures a contractor bills the government accurately. A deficiency in the accounting system results when a contractor is unable to ensure that costs do not exceed contract limitations. Many of the questions on the SF 1408 go hand in hand. For example, a contractor should be able to calculate and monitor indirect cost rates by following GAAP and segregating costs.

Policies and Procedures

Although, there is not a question on the SF 1408 about policies and procedures, they are still important to have. Having these in place provides evidence as to how the contractor manages each question on the checklist. Also, understanding the difference between accounting processes and internal controls is important. Accounting processes do not provide any proof of important activities such as fraud prevention. Proper policies and procedures help to regulate internal controls, as well as provide necessary documentation. Many internal control procedures are detrimental to the passing of the pre-award survey.

A government contractor passes the pre-award survey once their accounting system is deemed acceptable. Passing of the survey requires expertise in many areas such as GAAP financial reporting and government regulations. This may seem like a daunting task, but it does not have to be. Having a team with these specialties makes all the difference.

Originally written by Cheryl Jefferson Cooke, CPA/CFF

Updated and additional content provided by Elizabeth Partlow

Advertising and Public Relations Costs

The investment in advertising and public relations costs is one many business owners are willing to make. These costs often provide a return on investment, ultimately helping to grow your business. As a government contractor though, these costs can cause quite the headache. The classification of Advertising and public relations costs can be tricky for government contractors. Knowing the distinction between allowable and unallowable costs can help you remain compliant, while reaping many benefits.

Advertising is ‘the use of media to promote the sale of products or services.’ Examples of advertising media are magazines, newspapers, conventions, and direct mail. Public relations are ‘all functions and activities dedicated to maintaining, protecting, and enhancing the company image or maintaining or promoting favorable relations with the public.’ Public relations include activities that relate to advertising and customer relations. Advertising and public relations costs include:

• Costs of media time and space
• Purchase of services outside organizations perform
• Applicable portion of salaries, travel and fringe benefits of employees that engage in the functions and activities that FAR 31.205-1 identifies.

Allowability of Advertising and Public Relations Costs

When determining the allowability of advertising and public relations costs a basic rule of thumb exists. If these costs relate to benefiting the government, then they are most likely allowable. If not, they are unallowable. Government contractors often take a conservative approach to these costs and classify them as unallowable. However, in doing this they take the chance of not recouping the costs from the government.

The Federal Acquisition Regulation (FAR) sets specific guidelines to determine the allowability of these costs. Advertising costs are allowable only if FAR 31.205-1(d) indicates they are. Allowable advertising costs include:

• Costs that arise from requirements of government contracts
• Costs to promote sales of products normally sold to the U.S. government
• Costs that are allowable in accordance with FAR 31.205-34

The guidelines for allowable public relations costs include that they must be a requirement for contracts. Also, there are other guidelines for these costs to be allowable that FAR 31.205-1(e) addresses. Examples of allowable public relations costs are:

• Responding to inquiries about a company’s policies
• Communicating with the public
• Costs of participation in community service activities such as blood bank drives and disaster assistance.

Unallowable Advertising and Public Relations Costs

These costs can, however, also be unallowable. FAR 31.205-1(f) provides guidance for the determination of unallowable costs. If a cost does not meet the requirements above, then it is unallowable. Some common examples of these unallowable costs are:

• Events that do not focus on the promotion of sales to the government
• Costs of corporate celebrations
• Cost of promotional material

Understanding the aspects of advertising and public relation costs is imperative as a government contractor. These costs can be tricky for government contractors. The misclassification of them can negatively impact your business. Having a team of experts to provide you with guidance can help ‘tackle’ this challenging subject.

Originally written by Jamie M. Shryock, CPA

Updated and additional content provided by Elizabeth Partlow

Common Problems for the Incurred Cost Submission

The Federal Acquisition Regulations (FAR) requires government contractors with certain contracts to submit an incurred cost submission (ICS). FAR 52.216-7 requires contractors who have time and material (T&M) or cost-reimbursable contracts to submit an ICS. The ICS schedules reconcile a contractor’s billings with the government. It does this by calculating the final indirect cost rates contractors incur. Government contractors have six months to submit an ICS after their fiscal year is over.

An ICS can be an overwhelming task to complete. The ICS model includes several schedules. Each of these schedules takes time, and usually many documents to complete. With at least fifteen schedules to complete, common problems may happen.

Job Cost Errors

As a government contractor, it is important to classify costs correctly. Therefore, classifying costs as direct, fringe, overhead, general & administrative, and unallowable is necessary. The proper classification minimizes the reporting errors of costs on the ICS schedules.

Segregating costs, such as allowable and unallowable costs, also prevents government contractors from incurring any penalties. The FAR clause 52.242-3 describes how contractors may face penalties as a result of including unallowable costs in their indirect cost pools.

Similarly, the job cost ledger not reconciling with the general ledger is another common problem for the ICS. Examples of why the two ledgers do not reconcile are:

• Not assigning direct costs to a job
• Assigning direct costs to a customer, not to a specific job
• Tagging indirect costs to a job

Invoice Errors

It is important to make sure invoicing for government contracts is done correctly. However, there are different requirements for each type of contract. Some contracts include restrictions or limits on the invoicing for certain costs. On the other hand, other contracts may require to invoice at negotiated rates. Common errors that occur during the invoicing process are:

• T&M contracts are not billed at negotiated rates
• T&M contracts are billed with labor rates and hours as lump sums
• Cost reimbursable contracts are billed like a T&M project.

In addition, over or under billings may exist on Schedule I as a result of job costs or invoicing errors. Due to this, the government contractor may owe the government money, or vice versa.

In conclusion, completing an incurred cost submission is necessary if government contractors have cost reimbursable or T&M contracts. Your virtual CFO should be proactive during the year to help minimize errors when completing an ICS. Ultimately, working having a virtual CFO who specializes in government contracting is the best.

Originally written by Jamie M. Shryock, CPA 

Updated and additional content provided by Elizabeth Partlow