Demystifying Compliance for A&E Firms
No matter what industry you’re in, compliance of some type is required. If you’re a government contractor, compliance should always be top of mind for you and your entire organization because the federal government is allowed to come in and audit your organization at any time. Even if you aren’t a government contractor, you may still be exposed to accounting regulations, both in the U.S. and abroad. However, complying with regulations isn’t really all that bad.
Sure, rules and regulations can be a hassle. Who really looks forward to April 15? But it’s best not to gripe; better to embrace compliance by developing and following sound compliance policies, for several key reasons.
Compliance policies show your corporate commitment to following the federal government’s rules. They demonstrate consistency in how you and your staff behave. They also lower your risk of exposure. And solid policies that your organization really follows reduce noncompliance in your government procurement program, and isn’t that the whole point?
To be fully compliant, you need to create policies on timekeeping, travel, delegation of authority, accounting, estimating, billing, and labor. You should even have a “policy on policy”, which is an outline of what a policy should look like.
Introducing FAR and CAS
If you do work for the federal government, two sets of federal government rules apply specifically to government contractors: FAR and CAS.
FAR is short for Federal Acquisition Regulation, which is essentially the bible of government procurement. It’s the primary set of rules agencies use when purchasing goods and services. The guide to FAR can be found at most public libraries, federal agency resource centers, and online.
CAS stands for Cost Accounting Standards. Established in 1968, CAS was created to drive consistency within and between contractors’ cost accounting practices. There are three major areas these standards cover (look it up for yourself in 48 CFR 9903.302-1, if you want):
1. Measurement of cost: This involves the methods and techniques used in defining the components of cost, determining the basis of cost measurement, and establishing criteria for the use of alternative cost measurement techniques. Here are some examples of cost measurement:
- The use of historical cost, market value, or present value
- The use of standard or actual cost
- The designation of items of cost that must be included or excluded from tangible assets or pension cost.
2. Assignment of cost to the cost accounting period: This has to do with determining the amount of cost that will be assigned to individual cost accounting periods. Examples are the requirements for use of accrual-basis or cash-basis accounting.
3. Allocation of cost to the cost objectives: This refers to the method of determining direct and indirect allocation of cost. Here are some examples of allocation issues:
- The accumulation of costs
- The determination of whether to charge costs as direct or indirect
- The determination of the composition of cost pools and their allocation bases
The federal government’s auditors and the Defense Contract Audit Agency use FAR and CAS as their rule books. The latter group, known as the DCAA, is responsible for auditing Department of Defense contracts, but it also provides auditing assistance to other agencies. Audits assure the government that your organization is following the rules. For more information on Earned Value Management System audits by the DCAA, please reference EVM For Dummies, Deltek Special Edition. Click here to download your complimentary copy.
Want to know what they’re looking for when they audit? It’s all spelled out in FAR. Check out the following list for common items and where to find the details:
Allowable costs: FAR 31.201-2
Unallowable costs: FAR 31.201-6, CAS 405
Direct costs: FAR 313.202
Indirect costs: FAR 31.203
Cost pools, pooling of indirect costs: FAR Part 31
The above article is an excerpt from the Deltek’s Special Edition “Project-Based ERP for Dummies”. To download your complimentary copy of the entire book click here.
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