project-based erp for dummies
Some 88 percent of companies use some type of ERP, an enterprise resource planning system that integrates a range of business information, from financial to customer to HR, and a lot more. But ERPs are not one size fits all. This is especially true among companies that execute projects for external customers.
Project-Based ERP for Dummies introduces the basic concepts of ERP systems that are intended to serve project-based businesses. Check out Article 6 "Compliance for Government Contracting" of the new Project-Based ERP for Dummies article series and see how your business can benefit from a purpose-built ERP system. (And in case you missed it... Article 5: Project-Based ERP for Dummies - Turn Knowledge into Wisdom.)
Compliance for Government Contracting
Get used to it. No matter what industry youre in, compliance of some type is required (click to tweet). If youre 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 arent a government contractor, you may still be exposed to accounting regulations, both in the U.S. and abroad. This article explains why complying with regulations isnt really all that bad.
Whats the Use of Compliance?
Sure, rules and regulations can be a hassle. Who really looks forward to April 15? But its 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 governments rules. They demonstrate consistency in how you and your staff behave. They also lower your risk of exposure. And if you have solid policies that your organization really follows, itll reduce noncompliance in your government procurement program, and isnt 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. No kidding. Its an outline of what a policy should look like.
FAR and CAS: Your Best Friends
If you do work for the federal government, two federal government rules regimes apply specifically to government contractors: FAR and CAS. FAR is short for Federal Acquisition Regulation, which is essentially the bible of government procurement. Its 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 at www.acquisition.gov/far.
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):
- 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 which must be included or excluded from tangible assets or pension cost
- 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.
- 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 governments auditors and the Defense Contract Audit Agency use FAR and CAS as their rulebooks. 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 Defense Contract Management Agency, please reference EVM For Dummies, Deltek Special Edition.
Want to know what theyre looking for when they audit? Its all spelled out in FAR. Check out the following list for common items and where to find the details:
File Your Disclosure Statements
A disclosure statement describes a contractors accounting practices and procedures. Fully CAS-covered contractors usually must complete one prior to landing a CAS-covered contract of $50 million or more. Also, corporate offices or other intermediate home offices that allocate costs to one or more disclosing segments must complete Part VIII of the disclosure statement. File it with your contract auditor and your administrative contracting officer, whom you may fondly refer to as your ACO. The ACO administers day-to-day activities after youre awarded a contract.
Once a disclosure is submitted, the ACO will ask auditors to make sure it discloses everything its supposed to under the CAS Boards rules, regulations, and standards. Simply put, the process is intended to collect a full description of a government contractors accounting system, uncover any deficiencies, and give contractors such as you a chance to address those deficiencies, clarify wording, or expand upon a description or accounting practice.
There are eight sections to a CAS disclosure statement:
- General information
- Direct costs
- Direct versus indirect costs
- Indirect costs
- Depreciation and use allowances
- Other costs and credits
- Deferred compensation and insurance
- Home office expenses
Watch the Clock Carefully
Its critical for every government contractor to track labor every day, because auditors want to be sure the government is paying for its project and nothing else. You can keep track manually or electronically, but if youre doing it manually, do it in blue or black ink. Track by project number or a contract name/number, and be sure that both employees and their supervisors sign off. If theres an error, draw a line through it and initial the change.
Want to help prevent audit headaches? Fully integrate your accounting system with your timekeeping system (click to tweet).
If you have an electronic timekeeping system, there are numerous considerations to keep in mind:
- Employees should be able to enter their own time into the system, and supervisors should use the same system to review and approve staff time.
- Payroll and timekeeping need to be segregated.
- Procedures must be evident and clear-cut.
- Controls must be verified, and any violations must be documented and remedied.
- Policies and procedures must be periodically reviewed with employees and managers.
- The system should allow direct entry of charging information, such as the project or contract number.
- Time should be entered on a daily basis.
Its important to enter all hours, whether theyre paid or not. And the employees themselves should enter the time; supervisors may only complete an employee timesheet if the employee is absent for an extended period of time.
Every employee needs to know that accurate and up-to-date time entry is a critical part of her job, and that entering the wrong hours or improperly preparing timekeeping reports will be penalized. The government may do a floor-check audit at any time thats when auditors ensure that employees are spending their time where their timesheets say theyre supposed to be. So be proactive and perform your own floor-check audits from time to time. Record them and make them available to auditors to show that youre serious about following the rules and regulations. Better for you to uncover any issues, rather than your DCAA auditor!
What about Pay?
When dealing with employee compensation, some costs are allowable and other costs arent. Allowable cost for salaries include:
- Compensation reported on W-2 forms
- Payments in accordance with a written plan, offer letter, or employee contract
- All reasonable remuneration paid or proffered for services rendered
- Commitments made before services rendered
Auditors tend to pay special attention to executive compensation (dont we all?). For executive compensation to be considered allowable, it must be reasonable compared to other firms and it must related to services performed, rather than distribution of profits. That golden parachute for the top brass? Its only allowable if its not above normal severance pay limits.
A lot of people benefit from variable compensation you probably call it a bonus. This is considered allowable as long as a written plan is in effect before services are rendered, that the plan is followed consistently, and that its incentive-based, not based on profits. As for consultant pay for contract work, thats fine, but not if the consultant was previously classified as an employee.
Procurement and Subcontracts
What if you need to acquire property or equipment in the course of doing government work? There are a number of principles to keep in mind.
First of all, the government maintains any lease-or-buy authority. If these kinds of purchases are made with government money, the title resides with the government, not your organization. And lease or rental costs are allowable as long as theyre reasonable, but interest costs arent.
In other cases, youll be working with government-furnished property or equipment. Take good care of that property, because youre responsible for any loss or damage to the equipment. Youre also responsible for tracking the equipment and conforming to FAR Part 45 requirements.
When dealing with subcontractors many rules exist, and youll find them listed in FAR 19.502-2, if youre looking for a good read tonight. Youll need ACO approval when the subcontract is for cost reimbursement, time and material (T&M) or labor hours, and the cost is greater than $25,000 including the fee. Youll also need approval if the subcontract is fixed price and the cost is greater than $25,000 or 5 percent of the total estimated cost of the prime contract. And for most subcontracts greater than $100,000, approval is also a must.
Get to Know Your Auditor
The DCAA is just one of the potential auditors you might face. You could hear from an inspector general (or IG), whose job is examining the actions of a government agency as a general auditor. The IG ensures that the agency is operating in compliance with generally established government policies, audits the effectiveness of security procedures, and is on the lookout for misconduct, waste, fraud, theft, or certain types of criminal activity. There also are audit agencies within the U.S. Department of Urban Housing and Development (HUD), U.S. Environmental Protection Agency (EPA), and National Aeronautics and Space Administration (NASA).
For whoever is conducting the audit, there are key topics of interest. The auditor is ensuring that all transactions (including those involving your firm) are proper and legal. The auditor wants to be sure transactions are recorded accurately, and that everyone is complying with established policies.
Want to be as audit-safe as possible? Everyone in your organization has a role. Employees are responsible for timesheet accuracy and consistently following established policies. Management must ensure that policies are consistently applied and that auditors get the help they need.
When the auditors arrive, demonstrate a spirit of cooperation and show that you have a genuine desire to assist in the audit process. If possible, assign an audit liaison to be the primary face of your organization with the audit staff.
Better Follow the Rules
Civil and criminal penalties await your organization if youre found to be out of compliance. Civil penalties are determined per violation per invoice. The government can recoup $5,500 to $11,000 and the contractor may pay the government up to three times the damage. Ouch!
If thats not bad enough, criminal penalties are much more serious. Were talking up to five years imprisonment for whoever signed Certificate of Cost and Pricing data.
Its probably a no-brainer but still worth mentioning that you run the risk of having your payments suspended or the contract terminated. The latter can happen if termination is deemed to be in the best interests of the public (thats called convenience), or if your company is found to be in default on the contract, meaning youve failed to deliver.
Then theres debarment, which essentially means youre banned from the government contracting world. Debarment can either be statutory (for willful violations of certain statutes) or administrative (for violations of criteria provided in agency regulations).
A rundown of audit types
- Incurred cost: A review of accounting practices and systems, ensuring that costs charged are allowable, allocable, and reasonable.
- Pre-award audit: A review of procedures for generating a price
- Defective pricing: Ensures that cost and pricing data are current, accurate, and complete
- Forward pricing plan audit: A check of contract pricing rates to determine a fair and reasonable basis for negotiating a cost proposal
- Compensation and benefits: An audit of the contractors compensation system and related internal controls.
- Contract purchase systems review (CPSR A review to understand the contractors purchasing system and related internal controls.
- Labor charging/floor checks: A check for mischarges, fraud, and cost shifting, and a general check for accounting policy compliance.
It is a best practice to use accounting systems that help keep you compliant by having accurate data, process flows, and canned reports that help you respond to audits quickly and effectively.