InFocus DCAA Compliance for Government Contractors

While government contracting takes many forms, Clearview InFocus ERP software for architects and engineers is equipped to handle all of them.

Numerous government contractors are currently using InFocus and have survived DCAA audits. One is even printing out the government forms 1034 and 1035 and supporting documentation from within InFocus.

The DCAA (Defense Contract Audit Agency) is charged with ensuring contractor compliance with government contracting regulations. DCAA does not approve of accounting software per se. They approve software and procedures as implemented in a particular contractor. That said, there may well be some software that could not pass a DCAA audit no matter how implemented because the detail required for an audit is just not there.

The government contracts for goods and services using several types of contracts.

Fixed Price Contracts
With this type of contract, the economic risk is borne by the contractor, so the government has little concern with the accounting software that the contractor uses. But since the contractor bears the risk, he needs to be concerned that the accounting system he uses adequately reports costs applied to a project so that the current project may be conducted profitably and there are adequate records to support accurate pricing of future contracts.

There are several different types of fixed price contracts. The above statement applies to Firm Fixed Price (FFP) contracts. There are other types of Fixed Price contracts.

FFP Level-of-Effort contracts. With this type of contract, the burden is on the contractor to prove that the required level of effort over the contract period has, in fact, been applied to the contract. For this kind of contracting, the professional service firm should select software that best meets its own internal reporting needs. InFocus is designed from the ground up to support project-oriented professional service firms.

FFP Materials Reimbursement contracts apply a fixed price to the services provided but allow for reimbursement of materials used, usually with a markup to cover administrative costs. With this contract it is essential that the reporting system accurately track material costs applied to the project with the appropriate markup (which may vary from one contract to another).
InFocus captures the project and the lowest required element of the WBS (Work Breakdown Structure) and the rule for billing markup and/or billing status, along with the general ledger code at the original point of entry in the Purchase Journal.

Fixed-Price with Award Fees are often used when the contracting agency wants to reward some sort of goal achievement, usually exceeding deadlines for certain milestones. Here the important consideration is the ability of the software to define the various phases of the project with the associated deadlines and hopefully support the scheduling of human resources to meet or exceed the specified deadlines. Reports of resources applied and interim percents complete would be helpful in winning these contract performance awards.

InFocus provides for very flexible project structure design (work breakdown structure) along with unlimited and flexible user-defined fields in which to store whatever project descriptions would be required for appropriate reporting.

Fixed-Price with Economic Price Adjustment allows for variance from the fixed price when key cost elements, either labor or materials, vary significantly over time from those known at the beginning of the contract. The important consideration for the contractor here is accurate recording of the costs of labor and materials (and subcontractors if appropriate) over time in order to demonstrate that the raw costs have, in fact, changed and when they changed.

InFocus provides for scheduled changes to multipliers, pay rates and billing rates prior to their effective dates so that they will automatically kick in when the time comes. Every transaction has the appropriate data at the record level, with audit trail, in order to respond to a DCAA audit.

Fixed-Price Contracts with Economic Incentives are used with the contracting agency wishes to reward the contractor for lowering the cost of the project. The contract is still fixed, but the contract provides for adjustments to the contractor’s fee for coming in under budget. The total amount of the contract would be reduced in this scenario, but the actual profit earned by the contractor would be increased. This is beneficial to the contractor because it increases his fee and liberates his human resources to work on other projects. The important consideration for the software here is accurate and timely recording of costs over the life of the project along with accurate and timely reporting of percent complete, not for billing but for tracking achievement of deliverables.

InFocus also meets these requirements.

Fixed-Price with Prospective Price Redetermination contacts may be applied to very long-term contacts to allow for the anticipated adjustment of the cost of labor or materials over the life of the project. The consideration for the software here is accurate time-stamping of relevant costs as well as the ability to control changes in labor costs on specific dates in anticipation of those dates.

Every cost transaction is posted to an accounting period and a date. If an adjustment to a transaction impacts the posting period, that is automatically handled correctly and an audit trail is created which is easily reviewed.

Fixed-Ceiling-Price with Retroactive Price Redetermination contacts allow for such adjustments after the completion of the project. Here again the issue is accurate cost record by time period.

Cost-Plus-Fixed-Fee (CPFF) contracts will pay actual costs plus a pre-defined fee. In the case of labor cost, what is billed is the actual payroll cost of labor plus overhead (which is subject to audit) plus a Fixed-Fee which may be billed as a percentage of labor cost or based on percent complete independent of labor cost. Material and subcontractor costs are usually billed with a negotiated markup. In this case the software must be able to structure the project according to the contract, record labor and materials costs according to the project structure (known as the Work Breakdown Structure or WBS), and create an invoice that shows labor cost, overhead and profit (however determined in the contract). Since the contract type floats with the cost applied, DCAA is greatly concerned that labor and materials are appropriate to the project deliverables and that this can be audited and that any changes to labor or materials after original posting leave an audit trail.

There are several different kind of CPFF contract terms, but the reporting requirements among them do not vary.

InFocus meets all of these requirements, allowing for very flexible WBS with no limit to depth. Infinite length memo fields are in every line of every transaction in order to record any necessary justification for the transaction.

Time-and-Materials contracts are the most favored by contractors and least favored by contracting agencies because the economic risk is born by the agency, not by the contractor. T&M with an Upset Limit or cap shift the risk right back to the contactor. This is worse than FFP because the contractor loses if his costs exceed those covered by the cap, but he cannot win if he comes in under the cap, as he would with FFP contacting. Here the consideration for the software is the ability to apply project-specific billing rates, which may vary over time and from phase to phase within a project. Usually the contract contains project-specific billing rates by billing title (e.g. Engineer, Drafter, Project Manager, etc.) so the software must support this type of billing. Naturally all costs and rates must be auditable by DCAA, usually sometime after completion of the project.

InFocus billing terms allow for reimbursable markups and billing rates that can vary from project to project, phase/task to phase/task and over time. Different markups can be applied to different reimbursable types, as can billing status (billable/non-billable). Billing status can be set by default in project setup and also adjusted during the billing cycle.

Retainage (not to be confused with retainers) is the practice by some contracting agencies of holding back, or retaining, some percent of the billing in each billing cycle. This is usually expressed as some percent of some portion of the current invoice. Sometimes there is a maximum applied to retainage such that once that amount has been reached, the retainage itself can be billed and the retainage counter is reset. Most commonly retainage is applied to the labor portion of the invoice (whether T&M or Fixed-Fee), but it may also be applied to consultants and/or reimbursables, which can impose an economic hardship on small firms. The purpose of such a practice is to incentivize completion of the project by the contractor, since the effect may be to hold back his entire fee until the completion of the project. The retainage is not receivable until the cap has been reached or the contract completed and should not appear on AR reports until it has been claimed according to the contract terms. The key issue for the software is the ability to compute and display the retainage on the invoice and then track it by project for later collection.

InFocus allows for very flexible retainage definitions as to what is included in retainage, what the percent is, and what the maximum is. InFocus invoices correctly show retainage on the invoice and correctly post it to a retainage G/L code, not A/R.

The Defense Contract Audit Agency provides a helpful checklist to help firms who wish to become government contractors to assess whether their software complies with the government’s specific accounting requirements.

1. Is the accounting system in accord with generally accepted accounting principles?

GAAP is a set of standards that have as much to do with rules and procedures as with software. That is a long topic in itself, and obviously DCAA wants contractors using those standard. InFocus, like most commercially available software, supports GAAP compliance, but it is up to the professional service firm, with the advice of their CPA, to follow procedures that will also meet these standards.

2. Does the accounting system provide for:

a. Proper segregation of direct costs from indirect costs.

This standard is met in large part by the correct design and use of the chart of account (the list of G/L account codes). A CPA experienced with professional service firms should be helpful in designing such a COA, but Clearview/InFocus consultants are also able to provide counsel in this area. InFocus goes further by “enforcing” the correct use of the COA. A cost cannot be charged to a direct project and an indirect G/L code, and the reverse is true. This helps to reduce posting errors by accounting staff. In addition to that, direct and indirect G/L codes can be assigned to vendors and/or expense types to default into a Purchase Journal entry by default.

b. Identification and accumulation of direct costs by contract.

Reimbursable costs are posted to a project and the correct element of the work breakdown structure at the original point of entry (Purchase Journal, Cash Disbursement or Employee Expense Sheet), and if it is later reclassed, an audit trail is created.

c. A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives. (A contract is final cost objective.)

This involves the definition of overhead cost pools that later become the basis of the overhead multiplier applied to a project. DCAA defines which costs can be in these pools and will audit that after the completion of the project (with a possible readjustment of the multiplier). This again becomes an issue of the design of the COA, and for most professional service firms, this is not very complicated.

d. Accumulation of costs under general ledger control.

No costs can be posted to any ledger in InFocus without identification of the appropriate G/L code, and as noted, InFocus tries to assist by preventing direct/indirect mismatches.

 e. A timekeeping system that identifies employees’ labor by intermediate or final cost objectives.

All labor is posted in daily detail in InFocus and must be posted to the lowest available level of the work breakdown structure. The labor distribution applet then posts the labor cost to direct and indirect G/L codes based on the type of projects posted. There are labor codes and note fields to further clarify the nature of the labor charge, and these can be mandated on a project by project basis.

 f. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives.

See the previous note.

g. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account.

InFocus is a “real time” accounting system, meaning that time and expense data is available to project reports as soon as the <Enter> key has been pressed. Labor cost is available for billing when timesheets are submitted and approved, usually weekly. Labor cost will appear in General Ledger reports as soon as it is distributed, usually with the same frequency as payroll is paid, most commonly bi-weekly.

h. Exclusion from costs charged to government contracts of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions.

If the firms wishes to charge costs to a project that it considers direct but which the contracting agency considers unallowable, costs can be identified as non-billable by default either through the expense type code or a non-reimbursable element of the WBS.

 i. Identification of costs by contract line item and by units (as if each unit or line item were a separate contract) if required by the proposed contract.

InFocus can accommodate this requirement by defining the WBS according to the contract or if necessary by combining separate but related projects into a rollup node for project reporting or a billing group for combining multiple projects on a single invoice.

 j. Segregation of preproduction costs from production costs.

This is not usually an issue that applies to professional service firms, but if it should, it can be handled with an appropriate WBS.

3. Does the accounting system provide financial information:

a. Required by contract clauses concerning limitation of cost (FAR 52.232-20 and 21) or limitation on payments (FAR 52.216-16).

Limitations on reimbursable cost can be implemented with the use of InFocus’ Not-to-Exceed billing formats which stop the billing when a predefined cap has been reached.

b. Required to support requests for progress payments.

Progress payments are driven by costs incurred or percent accomplished (sometimes by passage of time). All can be documented with the data stored in InFocus.

4. Is the accounting system designed, and are the records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on acquisitions?

That is one of the benefits of InFocus. All cost data is captured and stored at a level of detail and with supporting commentary that follow-on analysis is enabled.

5. Is the accounting system currently in full operation? (If not, describe in Page 2 narrative which portions are (1) in operation, (2) set up, but not yet in operation, (3) anticipated, or (4) nonexistent.)

No firm would be well-advised to commence government contracting without a robust system like InFocus in place and fully configured with staff trained and experienced to operate it.

In Summary

InFocus is well suited for government contacting at the federal, state and local levels, and numerous firms are currently using it for that purpose and have successful completed DCAA audits based on data and reports from InFocus.