Implementing a FAR Part 31 Compliant Cost Accounting System
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This document provides an overview of implementing a FAR Part 31 compliant cost accounting system. It discusses choosing an accounting system, designing the system including the chart of accounts and budgeting process, required reports and outputs, audit compliance, and implementing the system through project management. The presentation emphasizes giving budget owners accountability, consistency in applying cost accounting practices for estimating and billing, and documenting all policies and procedures.
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Implementing a FAR Part 31 Compliant Cost Accounting System
- 2. Implementing a FAR Part 31 Compliant Cost Accounting System Breakout Session #: F11 Presented by: Robert E. Jones, CFCM, CCCM Date: July 23, 2013 Time: 4:00 PM – 5:15 PM
- 3. Agenda 1. Choosing a System 2. Designing Your System 3. Reports & Output 4. Audits & Compliance 5. Implementing Your System 3
- 4. Business Systems Rule FAR 242.70 1. Accounting and Billing Systems 2. Purchasing System 3. Estimating Systems 4. Government Property Management System 5. Material Management and Accounting System 6. Earned Value Management System 4
- 5. My Recent Experience • Oracle-based system • GAAP compliant • Mostly FAR 31 compliant • Poor budgeting • Lack of calculating and tracking rates • Little or no connection to the cost estimating & pricing process 5
- 6. 1.0 Choosing a System • What are the names of some compliant systems? • How do you get a DCAA-approved accounting system? 6
- 7. Parts of an Accounting System • Chart of Accounts • Timekeeping • Budgets • Estimating & Pricing • Invoicing 7
- 8. 2.0 Designing Your System 2.1 Four Reasons to Use ICE (Incurred Cost) 2.2 Five Steps for a Chart of Accounts 2.3 Three Keys to EASY Budgeting These are your takeaway items! 8
- 9. 2.1 Four Reasons to Use ICE 1. Start with a picture of the finished product! 2. You have a copy of the test, no reason you should fail. 3. You know what is expected of you and in what format. 4. You have the rule book! http://www.dcaa.mil/ice_model.html 9
- 10. 2.2 Five Steps for a Chart of Accounts 1. DCAA “Information for Contractors” 2. Follow FAR Part 31 3. Eliminate the “low hanging fruit” – M&E, Employee Welfare, Unallowables 1. Consistency 2. Documentation & Training 10
- 11. 2.2.1 DCAA “Info for Contractors” • Accounting System • Labor Charging System • Price Proposals • Cost Accounting Standards http://www.dcaa.mil/DCAAM_7641.90.pdf 11
- 12. DCAA Accounting System Checklist – Proper segregation of direct costs from indirect costs – Identification and accumulation of direct costs by contract – A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives – Accumulation of costs under general ledger control 12
- 13. DCAA Accounting System Checklist – A timekeeping system that identifies employees' labor by intermediate or final cost objectives – A labor distribution system that charges direct and indirect labor to the appropriate cost objectives – Interim (at least monthly) determination of costs charged to a contract through routine posting to books of account 13
- 14. DCAA Accounting System Checklist – Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR Part 31, Contract Cost Principles and Procedures, or other contract provisions – Identification of costs by contract line item and units (as if each unit or line item was a separate contract) if required by the proposed contract – Segregation of preproductions costs from production costs 14
- 15. Labor Charging System • Timekeeping procedures • Timesheet preparation • Recommended timekeeping policy • Labor floor checks or interviews • Penalties for labor mischarging 15
- 16. 2.2.2 Follow FAR Part 31 • DCAA FAR Cost Principles Guide – http://www.dcaa.mil/FAR_Cost_Principles_Guide .pdf • FARsite – http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/ fardfars/far/31.htm • Wolters Kluwer – http://gcblog.wolterskluwerlb.com/category/cost_ principles 16
- 17. 2.2.3 Eliminate “low hanging fruit” • Meals & Entertainment (M&E) • Employee Welfare • Other Unallowables 17
- 18. 2.2.4 Consistency • Always treat like and similar costs the same way. 18
- 19. 2.2.5 Documentation & Training • Policies • Procedures • Corporate Policies • Local Practices • Description of accounting system and how it is used • Train users on which accounts to use 19
- 20. 2.3 Three Keys to EASY Budgeting Three items that will forever turnaround your frustration with the budget process. It’s all about responsibility and ownership! 1.Chart of Accounts 2.Organizational Chart 3.Budget Ownership & Accountability 20
- 21. Chart of Accounts • The Chart of Accounts is your list of expenses. Go down the list and you shouldn't have any unexpected hiccups. If your Chart of Accounts is well-designed and laid out to match your cost pools and allocations, then calculating your rates and developing your pricing will be easier, too. 21
- 22. Organizational Chart • The Organizational Chart lists the managers and supervisors - the same people who are budget owners and approve expenses. Get them involved in the process. Users of a system have valuable input and will take ownership if they believe they are involved. 22
- 23. Budget Ownership & Accountability • You know who the budget owners are, now give them feedback in the form of monthly reports and hold them accountable. Have a system for explaining variances and require a written response for anything +/- 5%. You may go as far as incorporating corrective action plans for variances greater than +/- 10% or that persist for two or months. 23
- 24. 3.0 Reports & Output • G/L Reports (BS, IS, TB, CF) • Budget to Actual • Labor Distribution & Utilization • Standard Cost & Contribution Margin 24
- 25. 4.0 Audits & Compliance • Have you documented your policies, procedures, and system setup? • Have you provided training? • If the auditors call, ask them why type of audit http://www.dcaa.mil/audit_program_directory.h tml 25
- 26. 5.0 Implementing Your System Pulling it all together in project management • Define the goal • Set the milestones • Assign the tasks • Keep a log of activity and issues • Have regular, meaningful meetings • Have a steering committee 26
- 27. Review & Connect • Systems #1 & #3 should now work together. – “shall ensure that practices used to accumulate and bill costs are consistent with practices used to estimate contract costs (CAS 401 and FAR 31.201-1 and 31.203(d))” 27
- 28. Questions Robert E. Jones CFCM, CCCM Contracts Manager, Pole/Zero Corporation rjones@leftbrainpro.com (513) 728-1163 www.linkedin.com/in/rjones330 www.leftbrainpro.com 28
Notas del editor
- We could spend two or three days covering all of the sub-topics in this presentation. Some topics already have their own breakout sessions here at WC. My goal is to get you thinking at a high level about accounting systems and FAR Part 31 compliance. If you are getting ready to implement a new system or recognize shortcomings in your existing system, then sit up straight, listen, take notes, and ask questions. I’m going to highlight the topics or phases of an implementation that need to be considered and provide resources that you can use at home or in the office.
- “ Accounting and Billing” and “Estimating” are two of the six business systems under continued scrutiny by the Government. The Department of Defense (“DOD”) established, through what is called the “Business Systems Rule,” mandatory requirements for six contractor business systems, through changes to the DOD Federal Acquisition Regulation Supplement (“DFARS”), for contracts awarded after May 18, 2011. DFARS § 242.70; see also 76 Fed. Reg. 28,856 (May 18, 2011). The Business Systems Rule requirements reflect a combination of certain requirements that have existed for some time (such as the Cost Accounting Standards (“CAS”) and material management system requirements) with various criteria that the Defense Contract Audit Agency (“DCAA”) has attempted to apply for years (but without any authority to do so) and still other criteria that DCAA has sought to impose since the passage of the Sarbanes Oxley Act in 2002 and the effective date of the FAR Mandatory Disclosure Rule in 2008. These requirements may become best practices for all government contracts.
- What was missing from the “mostly FAR 31 compliant” system?
- Let’s talk about key components of an accounting/ERP system. Keep in mind that an ERP system is more than just accounting – can have customer orders, purchasing, engineering, document management, manufacturing, inventory, etc.
- If you were going to take a test, wouldn’t it be helpful to study first? What if you had exact questions from the test? What if you had the actual test?
- Accounting System Proper segregation of direct costs from indirect costs Identification and accumulation of direct costs by contract A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives Accumulation of costs under general ledger control A timekeeping system that identifies employees' labor by intermediate or final cost objectives A labor distribution system that charges direct and indirect labor to the appropriate cost objectives Interim (at least monthly) determination of costs charged to a contract through routine posting to books of account Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR Part 31, Contract Cost Principles and Procedures, or other contract provisions Identification of costs by contract line item and units (as if each unit or line item was a separate contract) if required by the proposed contract Segregation of preproductions costs from production costs Labor Charging System Timekeeping procedures Timesheet preparation Recommended timekeeping policy Labor floor checks or interviews Penalties for labor mischarging Price Proposals Cost Accounting Standards
- FAR Cost Principles Guide - a chronology of revisions to FAR Part 31 since 1984 – is used to determine the cost principles in effect at time of contract award that may be necessary for audits of historical costs (e.g. Incurred Cost audits or Claims audits).
- One of the things I learned in my first accounting job in a public firm was “consistency, consistency, consistency.” Their approach was, even if you are doing it wrong, you’re likely to get in less trouble than if you keep changing methods from month-to-month or year-to-year.
- The complaints I have heard for years around budgeting are that “it doesn’t matter,” “I’m held responsible, but have no authority,” “I have no input,” etc. Change that paradigm in your organization today! Supervisors and managers are the ones ultimately held responsible for the budget. Correct? They are also on your Organizational Chart. Correct? Get them involved in the process! Give them ownership. Give them feedback. Hold them accountable. Just remember that you can’t hold them accountable if they had no input or get no feedback.
- Some of this is standard. Some of these reports are needed by your Supervisors and Managers to feel they are a part of the process. This is their feedback!
- Could be a desk review of a proposal. Could be a technical review by DCMA of LOE. Could be a full rate audit. Pre-Award Audit Post-Award Audit Floor-check Audit
- The steering committee should be a cross-functional team of senior managers and would likely include someone from your corporate office. This group should help evaluate scope creep, hold the implementation team accountable, and ensure the team and project are on target to satisfy the goal – not just completing the implementation, but providing a viable solution that is in the spirit of the project.