Selecting a Government Accounting Software / System
There are certain business attributes that are fundamental to quality accounting software. It should:
- Accurately and consistently record financial data
- Allow additional financial data to be processed and retained as the business grows
- Have control features that will adequately protect their data and support their existing internal controls
- Accommodate unique accounting and operational needs
Maintaining an audit trail for transactions is a critical feature for government contractor accounting software. Not all packages have the same capabilities. For example, the software should allow you to make corrections to labor hour data while maintaining an audit trail of employee changes and supervisory approval. Commercial packages generally do not maintain detailed audit trails.
A cost accounting system should have the following core modules:
- General Ledger/Chart of Accounts
- Labor Distribution and Payroll Processing
- Accounts Receivable
- Job/Project Cost Module
- Accounts Payable
General Ledger/Chart of Accounts:
An operational accounting system that is under general ledger control is critical when performing government cost-reimbursable contracts. The general ledger must integrate into other modules, such as the timekeeping and labor distribution. The chart of accounts is notable for government contractors because of the need to identify and segregate unallowable costs. Unless the software maintains discrete accounts and supporting processes, it is likely that the unallowable costs will find their way into an invoice. Another key issue is the ability to identify contract/project work-in-process (WIP) as it accumulates. GCAS automatically transfers the WIP from the Balance Sheet to the Income Statement Cost-of-Goods-Sold when revenue is recognized by invoicing the customer. GCAS also automatically calculates various pool rates at any time, and will automatically allocate the indirect costs associated with each pool to Direct and IR&D/B&P jobs, or appropriate higher-level pools.
Labor Distribution and Payroll Processing:
It is important to realize that labor and payroll processing are two distinct functions. The Labor Distribution collects all employee recorded hours against each job within each department; converts the hours to labor dollars using pay rates found in the Human Resource module; and writes the dollars to the general ledger by job and department. Accurate Labor recording and distribution is the most scrutinized area examined the DCAA auditor, primarily because labor represents the largest cost in most contracts. Payroll Processing on the other hand, is not concerned with job costing except for fringe paid absences and accruals. The recorded gross payroll is checked against the total labor charges in the incurred cost submission. GCAS supports payroll including federal and state taxes; direct deposits or printing of checks; or the creation of file for all the popular payroll services.
Invoicing is a vital and complex function of any accounting system. Government contractors have numerous invoice formats and are often required to present additional invoicing information within awarded contracts.
Cost type invoices should use only the appropriate provisional rates. Under some contracts, the invoicing module must accommodate billing of “capped rates,” which can be lower than the provisional rates. Further, there should be consideration of contract-specific unallowable direct costs that are not reimbursable (e.g., travel costs). Invoicing/billing modules should include controls that billings do not exceed the contract ceiling/funding level or maximum fee level (especially in situations where fee withholds are in effect).
When contracts contain clauses FAR 2.232-16,”Progress Payments,” or 52.216-7 “Allowable Cost and Payment,” the government’s expectation is that when contractor invoices based on costs incurred, it should exclude any costs that are not paid within the ordinary course of business. This seems simple, but can be quite difficult to execute, particularly when a small business takes advantage of the FAR provision allowing them to submit an invoice for costs based on an issued Purchase Order.
Accounts Receivable Functionality:
While this area is generally not driven by government requirements, the accounts receivable module should allow for flexibility in cash receipt processing, as well as reporting aged receivable balances. The system should allow you to track and report possible prompt payment claims.
Job/Project Cost Accounting:
Government contract cost accounting is based on the fundamental concept of direct versus indirect costs. The cost principles outlined in FAR 31.202, and 31.203, as well CAS 402 provide an important framework of consistency that aims to ensure consistency in accounting and helps prevent overcharging and double-counting.
Fundamentally, cost accounting sub-ledgers (or modules) assign direct costs to projects/jobs at the appropriate task/subtask/work breakdown structure/line item levels. Once these direct costs are assigned, they are burdened with their appropriate indirect costs. The accounting system should be capable of identifying, segregating, and burdening unallowable project related direct costs so they may be included in the total project costs, while segregating costs that should be excluded from billings to the government.
The real-time calculation of the various pool rates (e.g., Labor Overhead) and the allocation of indirect costs to the various jobs are tedious functions that very few accounting packages can perform. They require you to calculate the rates and allocation using complex spreadsheets and subsequent manual entries into the general ledger for each monthly accounting period. GCAS does this automatically.
Accounts Payables Functionality:
Aside from generic AP functionality, you need to ensure that unallowable costs are identified and properly assigned to the correct account and pool. The accounts payable module should also allow for flexibility in processing full and partial payments of vendor and subcontractor invoices.