Introducton To Government Contracting (4-28-15)

Overview of Accounting
Requirements in Government
Warren Stoker
Vice President, Government Liaison &
Business Process Controls,
Textron Inc.
University of Texas at Arlington
CPA Day – August 20, 2015
Learning Objectives
• Identify how certain U.S. Government (USG)
acquisition policies drive associated
accounting practices
• Identify specific USG Contract types requiring
unique accounting practices
• Identify reasons supporting the requirement
for these accounting practices
• Review examples of the required accounting
• Provide sources for additional information
Applicable Regulations
• Federal Acquisition Regulation (FAR)
– FAR is codified in Title 48 of the United
States Code of Federal Regulations
– FAR and its agency supplements have “the
force and effect of law,” see Davies Precision
Machining, Inc. v U.S., 35 Fed. Cl. 651
– Nearly all government agencies are
required to comply with the FAR.
Significant FAR Parts
• FAR part 12 describes policies and procedures
unique to the acquisition of commercial items. It
implements the Federal Government’s preference
for the acquisition of commercial items contained
in Title VIII of the Federal Acquisition
Streamlining Act of 1994 (Public Law 103-355) by
establishing acquisition policies more closely
resembling those of the commercial marketplace
and encouraging the acquisition of commercial
items and components.
Significant FAR Parts
• FAR Part 15 describes policies and procedures
governing competitive and noncompetitive
negotiated acquisitions.
• Part 16 – Types of Contracts – describes type of
contracts that may be used in acquisitions and
when the various types should be used. Common
contract types used by DOD are Fixed Price, Cost
Reimbursement, Cost + award fee, and Cost +
incentive fee among others.
Significant FAR Parts
• Part 30 – Cost Accounting Standards (CAS)
Administration - describes policies and
procedures for applying CASB rules and
regulations to negotiated contracts.
• Part 31 – Cost Principles and Procedures – for the
pricing of contracts, subcontracts and
modifications to contracts and subcontracts when
ever cost analysis is performed, and the
determination, negotiation, or allowance of costs
when required by a contract clause.
DoD FAR Part 15 vs. Commercial
Acquisition Process
• The primary driver relative to DoD vs.
Commercial acquisition process is based on the
consumer and market relationship.
• In commercial markets, consumers typically have
many similar products from which to choose (i.e.,
Ford, GM, Honda, Toyota, etc.).
• The consumer makes their choice based on need
and available data, including price.
• Generally, Price is the primary consideration.
DoD FAR 15 vs. Commercial
Acquisition Process
• DoD acquisitions generally start with issuance of a
Request for Proposal (RFP). These proposals will
often include the technical requirements that DoD
specifies to meet their need (i.e., an aircraft that can
fly x mph at x altitude for x period of time with a
payload capacity of x). Due to the limitations of
companies that are able to comply with security and
system requirements for this type of contracting, the
list is typically short, and may even be a sole source
• Generally, Costs are the primary consideration.
Types of Costs - Direct Cost
• Direct Cost - any cost that is identified specifically with a
particular final cost objective. Direct costs are not limited to
items that are incorporated in the end product as material
or labor. Costs identified specifically with a contract are
direct costs of that contract All costs identified specifically
with other final cost objectives of the contractor are direct
costs of those cost objectives
• Examples of Direct Cost
Program Specific Cost
Direct Labor
Manufacturing Assemblies
Types of Cost - Indirect Cost
• Indirect Cost - any cost not directly identified with a
single final cost objective, but identified with two or
more final cost objectives or with at least one
intermediate cost objective.
– FAR Subpart 2.1
• Examples of Indirect Cost
Indirect Labor
Office Supplies
Human Resource Support
Information Technology Support
How Indirect Costs are Reported to
the Government
• Primary Documents the Vendor provides to the USG:
– Disclosure Statement – details the manner in
which corporate office costs are accumulated (by
pool) and subsequently allocated (over base)
based on a causal/beneficial relationship as
defined in the FAR and DFARS.
– Incurred Cost Submittal – Provides the USG with
the total corporate cost for the prior year (less
those determined to be unallowable, unallocable,
or unreasonable) in accordance with the
Disclosure Statement.
How Indirect Costs are Reported to
the Government
– Forward Pricing Rates – a forecast of costs for the
current year plus three years into the future.
These rates are utilized for estimating cost for
future USG contracts and would be included with
– Forward Pricing Rate Agreement – formalized
agreement between the contractor and the
Government defining the rate package (i.e., any
escalation factors, assumptions, etc. used in the
FAR Part 31 Identifies Covered Costs
Cost Type
FAR Reference
Public Relations and Advertising Costs *
Bad Debts
Bonding Costs
Compensation for Personal Services
Contributions or Donations *
Cost of Money
Economic Planning Costs
Employee Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits *
Entertainment Costs *
Fines, Penalties, and Mischarging Costs
Gains and Losses on Disposition or Impairment of Depreciable Property or Other Capital Assets
Idle Facilities and Idle Capacity Costs
Plant Reconversion Costs
Precontract Costs
Professional and Consultant Service Costs
Recruitment Costs
Relocation Costs
Special Tooling and Special Test Equipment Costs
FAR Covered Costs (cont.)
Cost Type
Termination Costs
Independent Research and Development and Bid and Proposal Costs
Insurance and Indemnification
Interest and Other Financial Costs
Independent Research and Development and Bid and Proposal Costs
Insurance and Indemnification
Interest and Other Financial Costs
Labor Relations Costs
Lobbying and Political Activity Costs
Losses on Other Contracts
Manufacturing and Production Engineering Costs
Material Costs
Organization Costs
Plant Protection Costs
Patent Costs
Trade, Business, Technical and Professional Activity Costs
Training and Education Costs
Travel Costs *
Costs Related to Legal and Other Proceedings
Research and Development Costs
Costs of Alcoholic Beverages *
Asset Valuations Resulting from Business Combinations
FAR Reference
Cost Criteria
• In accordance with FAR 31.203 certain criteria
must be met in order to charge costs to the USG.
• Costs must be Allowable, and
• Costs must be Allocable,
• Pursuant to guidance in FAR Part 30 – Cost
Accounting Standards (CAS).
Allowability of Cost
• Cost is allowable only when the cost complies with all of the
following requirements:
– Reasonableness
– Allocability (Costs can be allocable but Unallowable)
– Standards promulgated by the CAS Board, if applicable, otherwise
relevant US GAAP (Generally Accepted Accounting Principles)
– Terms of the contract
– Any limitations set forth in this FAR Subpart 31.203
• Even if a contract is not CAS covered, Allowable/Unallowable
determination must be made
• Inconsistent treatment of cost may result in a portion of cost being
questioned as unallowable
• Contractors are responsible for maintaining adequate cost
documentation records in order for the cost to be considered
Unallowable Cost Review and
• Direct cost (i.e., manufacturing assembly) are charged
directly to the contract
• Indirect costs (i.e., accounting labor, office supplies)
must be “cleansed” before being charged
– In a government contracting environment unallowable cost
must be removed before costs are charged to the US
Government in the Incurred Cost Claim for the year
Cost Incurred
Unallowable Cost
Allowable, Indirect
Costs Built into Claim
Cost charged to the
US Government
Allocability of Cost
• A cost is allocable if it is assignable or chargeable
to one or more cost objectives on the basis of
relative benefits received or other equitable
relationship. Subject to the foregoing, a cost is
allocable to a Government contract if it
– Is incurred specifically for the contract
– Benefits both the contract and other work, and can be
distributed to them in reasonable proportion to the
benefits received
– Is necessary to the overall operation of the business,
although a direct relationship to any particular cost
objective cannot be shown
Cost Accounting Standards (CAS)
CAS are mandatory for use, as applicable, by the
prime contractors and subcontractors of all
executive agencies in estimating, accumulating, and
reporting costs, and settlement of disputes
concerning, all negotiated prime contract and
subcontract procurements with the United States
Government that are in excess of $650,000 and not
exempted by CAS Board regulations
CAS Sections
401 Consistency in Estimating, Accumulating,
and Reporting Costs
402 Consistency in Allocating Costs for the
Same Purpose
411 Accounting for Acquisition Costs of
412 Composition and Measurement of
Pension Cost
403 Allocation of Home Office Expenses
413 Adjustment and Allocation of Pension Cost
404 Capitalization of Tangible Assets
405 Accounting for Unallowable Costs
414 Cost of Money as an Element of the Cost
of Facilities Capital
415 Accounting for the Cost of Deferred
406 Cost Accounting Period
416 Accounting for Insurance Costs
407 Standard Costs
417 Cost of Money as an Element of the Cost
of Capital Assets Under Construction
408 Costs of Compensated Personal Absence
418 Allocation of Direct and Indirect Costs
409 Depreciation of Capital Assets
419 Reserved
410 Allocation of G&A
420 Accounting for IR&D and B&P Costs
CAS 401: Consistency in Estimating,
Accumulating and Reporting Costs
• Purpose
– To ensure that the contractor’s practices used in
estimating costs for a proposal are consistent with
cost accounting practices used to accumulate and
report costs
• Basic requirements
– Classification of elements or functions of costs as
direct or indirect
– The indirect cost pools to which each element or
function of costs charged or proposed to be charged
– Methods of allocating indirect costs to the contract
CAS 401: Consistency in Estimating,
Accumulating and Reporting Costs
• Purpose
– To ensure that the contractor’s practices used in
estimating costs for a proposal are consistent with
cost accounting practices
used to accumulate and
Earned Value
Basic requirements
– Classification of elements or functions of costs as
direct or indirect
– The indirect cost pools to which each element or
function of costs charged or proposed to be charged
– Methods of allocating indirect costs to the contract
CAS 402: Consistency in Allocating
Costs for the Same Purpose
• Purpose
– No final cost objective shall have any cost
allocated as an indirect cost, if other costs
incurred for the same purpose, in like
circumstances, have been included as a direct cost
of that or any other final cost objective, and vice
• Basic requirements
– Equally applicable to estimates of costs to be
incurred as used in contract proposals
CAS 405: Accounting for Unallowable
• Purpose
– To facilitate contract negotiation, audit, administration and settlement
• Basic Requirements
– Costs expressly unallowable, or mutually agreed to be unallowable,
shall be identified and excluded from any billing, claim, or proposal
– Costs which become designated as unallowable as a result of a CO’s
written decision pursuant to disputes procedures shall be identified if
included or used in the computation of any billing, claim, or proposal
– Costs directly associated with unallowable costs that would not have
been incurred if not for the incurrence of the unallowable costs are
also unallowable
– Costs of any project not contractually authorized shall be accounted
for in a manner which allows ready separation from costs of
authorized projects
– Where unallowable costs are normally part of a base(s) for the
allocation of indirect expenses, the unallowable costs shall remain a
part of the base(s)
CAS 407: Standard Costs
• Purpose
– To improve cost measurement and cost assignment for
contractors that choose to use a "standard" type
accounting system
• Basic Requirements
– Standard costs may be used for estimating, accumulating,
and reporting costs of direct material and direct labor
• Standard costs are entered into the books of the account
• Standard costs and related variances are appropriately accounted
for at the level of the production unit
• Practices regarding the setting and revising of standards, use of
standard costs, and disposition of variances are stated in writing
and are consistently followed
CAS 410: Allocation of G&A Expense
• Purpose
– To provide criteria for the allocation of business unit G&A expenses to
business final cost objectives based on their beneficial or causal
• Basic Requirements
– Business unit G&A expenses shall be grouped in a separate indirect
cost pool which shall be allocated only to final cost objectives
– The G&A expense pool shall be allocated by means of a cost input
base which best represents the total activity of a typical cost
accounting period (i.e., total cost input, value-added cost input, or
single element cost input)
– Home office expenses received by a segment shall be included in its
G&A expense pool (exceptions apply)
– Any costs that do not satisfy the definition of a G&A expense can
remain in the G&A pool unless they can be allocated on a beneficial or
causal relationship best measured by a base other than cost input
CAS 418: Allocation of Direct and
Indirect Costs
• Purpose
– To improve classification of costs as either direct or indirect and
as such
– To provide criteria for accumulating indirect cost into cost pools
• Basic Requirements
– Indirect costs shall be accumulated in homogeneous cost pools
– Pooled costs shall be allocated to cost objectives in reasonable
proportion to the beneficial or causal relationship as follows:
• If cost pool costs consist of material amounts of management or
supervision costs, the pool shall be allocated to a base representative
of the activity being managed or supervised.
• If management or supervision costs are not significant, the pool shall
be allocated based on resource consumption measure
CAS 420: Accounting for IR&D and
B&P Costs
• Purpose
– To improve cost allocation of Internal Research & Development
(IR&D) and Bid & Proposal (B&P) costs
• Basic Requirements
– IR&D and B&P costs shall be tracked by individual project
– The IR&D and B&P cost pools shall consist of project costs and
other allocable costs except G&A
– The IR&D and B&P cost pools of a home office shall be allocated
to segments based on a beneficial or causal relationship
– The IR&D and B&P cost pools of a business unit shall be
allocated to the final cost objectives of that business unit based
on a causal/beneficial relationship
– IR&D and B&P costs incurred in a cost accounting period shall
not be assigned to any other period (exceptions apply to IR&D)
Costs Must Also Be Determined
• A cost is reasonable if, in its nature and amount, it does not exceed
that which would be incurred by a prudent person in the conduct of
competitive business. What is reasonable depends upon a variety
of considerations and circumstances, including
– Whether it is the type of cost generally recognized as ordinary
and necessary for the conduct of the contractor’s business or
the contract performance
– Generally accepted sound business practices, arm’s-length
bargaining as well as Federal and State laws and regulations;
– The contractor’s responsibilities to the Government, other
customers, the owners of the business, employees, and the
public at large
– Any significant deviations from the contractor’s established
Additional Definitions
Actual Costs - (except for Subpart 31.6) amounts determined on the basis of costs incurred,
as distinguished from forecasted costs. Actual costs include standard costs properly adjusted
for applicable variances
Allocate - to assign an item of cost, or a group of items of cost, to one or more cost
objectives. This term includes both direct assignment of cost and the reassignment of a share
from an indirect cost pool
Cost Objective - (except for Subpart 31.6) a function, organizational subdivision, contract, or
other work unit for which cost data are desired and for which provision is made to
accumulate and measure the cost of processes, products, jobs, capitalized projects, etc.
Expressly Unallowable Cost - a particular item or type of cost which, under the express
provisions of an applicable law, regulation, or contract, is specifically named and stated to be
Indirect Cost Pools - (except for Subparts 31.3 and 31.6) groupings of incurred costs identified
with two or more cost objectives but not identified specifically with any final cost objective
Profit Center - (except for Subparts 31.3 and 31.6) the smallest organizationally independent
segment of a company charged by management with profit and loss responsibilities
Additional Resources
Code of Federal Regulations
Title 41 of the United States Code
Federal Acquisition Regulation (FAR)
Defense Federal Acquisition Regulation
Supplement (DFARS)
• Defense Contract Management Agency (DCMA)
• Defense Contract Audit Agency (DCAA)