The Art of Navigating Cost-Plus Contracts

Deltek’s recent Clarity 2022 Government Contracting Industry Study revealed that overcoming audit challenges associated with accurately calculating and reporting costs to the government is top of mind for financial leaders, presenting a challenge to nearly four out of 10 of businesses surveyed. Indirect rate build-ups, labor and timekeeping practices, and exclusion of unallowable costs play a major role in managing cost reimbursement (Cost-Plus) type contracts with the government. And although all contracts with the government have some level of scrutiny of contractor accounting systems and practices, Cost-Plus contracts are surveilled more closely and audited more frequently.

This higher level of regulatory oversight of contractor accounting and cost collection and allocation practices can be daunting to small business or those that are new to government contracting. As a result, they may shy away from doing Cost-Plus work in favor of what may be considered less complex or less risky contract types like Fixed Price or Time & Materials (T&M). This hesitancy to pursue Cost-Plus work may limit the type or scope of work a contractor can compete for. Research & Development (R&D) contracts, for example, are often bid as Cost-Plus because the scope of work is hard to define or estimate costs for at the beginning of the contract. Cost-Plus contracts give both the contractor and the government the agility to complete the work without leaving the contractor at risk for losing money on unexpected costs.

Deltek Costpoint was purpose built to provide the guardrails to keep contractors compliant with the government accounting standards associated with Cost-Plus contracts and to always keep them Defense Contract Audit Agency (DCAA) audit ready.

Why Does Contract Type Matter?

The main difference between the most common contract types – Fixed Price, T&M and Cost-Plus – is the specificity of the costs that are passed on to the government. Entering into a Fixed Price contract means that the contractors’ bid price for contract deliverable(s), both goods and/or services, is set and the contractor needs to manage to that budget to achieve the cost and profit objectives their business expects. Costs that are higher than estimated are not reimbursed by the government, they will come out of the profit for the business. T&M contracts do have an element of cost reimbursement for the materials portion but the rates for the time (or labor) are meant to include all burdens such as overhead costs, general and administrative (G&A) costs and profit (or fee). The overhead and G&A costs for T&M contracts are estimated when preparing a contract bid to determine the fixed rate charged to the government. During execution of the contract if the burdened costs end up being higher than expected, they will not be passed on to the government and will instead be absorbed by the business until new rates are negotiated.

Cost-Plus contracts, as the name suggests, are contracts where the government reimburses the contractor for costs incurred during execution of the contract. These costs may include labor, materials, subcontracts as well as allocation of overhead and G&A costs. In Cost-Plus contracts the “fee”, or profit, is calculated separately from the costs and can be fixed or incentive based. As a result of the government reimbursing the contractor for costs that are not always known at the beginning of the contract the government levies an added layer of surveillance on contractor accounting systems and processes to ensure accuracy of the costs they are charged. This shows up as pre-award accounting systems audits and annual or semi-annual incurred costs submissions.

Despite this additional scrutiny by the government, contractors can be successful at executing Cost-Plus contracts if they have the proper accounting systems and processes in place at the start of the contract. In fact, Cost-Plus contracts should be a considered part of a healthy contract mix for these reasons:

• Present less risk for the contractor as all allowable costs are reimbursed
• Result in more responsive cash flow – costs are often billed out as they are incurred, usually monthly
• Fund new technology or new developments that may be hard to estimate costs for at the beginning of the contract

Considerations for Ensuring Success Managing Cost-Plus Contracts

#1 - When assessing your businesses’ readiness for the cost accounting compliance requirements that come along with government contracting, it may be necessary to perform an inventory of the processes and business systems you already have in place to ensure compliance with the Federal Acquisition Regulations (FAR) or Defense Federal Acquisition Regulations (DFARs).

#2 - Contractors’ need to be able to demonstrate that their accounting system will comply with FAR/Cost Accounting Standards (CAS) in order to successfully complete DCAA or Defense Contract Management Agency (DCMA) audits. Furthermore, they are subject to at an annual incurred cost submission where they are required to provide a deeper level of detail and traceability on how their costs are collected, allocated and calculated.

#3 - When evaluating accounting systems, contractors should look for a system that natively provides the functionality, controls and reporting for financial compliance, with built-in audit support. Systems that automate back-office and front-office processes and provided complete cost traceability will lessen the burden on financial teams and ensure that there is less risk for human error. Here are some other must-have elements for a profitable, compliant Cost-Plus ready accounting system:

• Provides flexibility and automation when determining cost measurement
• Supports cost reporting on current period and year to date for every pool and every year
• Utilizes out of the box reports that DCAA commonly asks for (examples: statement of indirects, incurred cost submission, and forward pricing)

If you are managing Cost-Plus contracts or are looking to gain a competitive advantage to position your business for the win on an upcoming award, the question to ask yourself is: How confident are you that your system can meet these requirements today?

Building a Compliant, Profitable Cost Accounting Infrastructure with Deltek Costpoint

If your business is managing multiple government contracts, or multiple phases within a contract, and your finance team is outnumbered or struggling to keep pace, it may be time to prioritize switching to an accounting system that was purpose built for government contractors to meet their unique needs.

Deltek Costpoint provides contractors the ability to future-proof your business by supporting all contract types including fixed price, T&M, and cost-plus. Costpoint allows firms to record contract costs at the necessary level of detail, burden those costs with the appropriate indirect burden, and properly report those cost to the client agency as invoices or incurred cost submissions. Costpoint provides functionality for time and expense entry and everyday financial and back-office operations like accounts payable, accounts receivable, general ledger and financial reporting. Dedicated Costpoint modules for contracts and supply chain management, procurement and manufacturing are fully integrated with the project accounting engine so even costs generated in those domains are rolled up to the general ledger. The integration of these modules in conjunction with other Deltek reporting tools provide government contractors with a robust all-in-one system that can fully satisfy financial system requirements.

Want to Learn More?

We are excited to announce the launch of Deltek’s GovCon University, an educational series designed to help government contractors gain greater knowledge and insights into important industry topics.

Check-out the latest on-demand webinar, Guide to Government Contract Types, to learn more about the distinctions between each, to the unique approaches necessary to bidding and best practices for performing the work for each different contract type.