NCMA Workshop 70 Wilbur Street Unit 3 Lowell

NCMA Workshop 70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com March 8, 2017 70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Peter Witts, CPA Developing a Compliant Accounting System for Small Businesses © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Background Information Former DCAA Auditor – Northeastern Region – June 1989 -September 2000 Practicing CPA since September 2000, supporting the unique accounting needs of Government Contractors Developed Indirect Expense Rates for proposals, billing and negotiated rates Developed compliant accounting systems deemed adequate by the DCAA Prepared Incurred Cost Submissions and Indirect Rate Proposals Supported audits conducted by DCAA and DCMA © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com OBJECTIVE Provide and overview of developing a compliant accounting system for small businesses that will stand up to a DCAA audit. © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Why are you required to have a Compliant Government Contract Accounting System? Cost-Type Contracts FAR 16. 301 -3 - Limitations “(a) A cost reimbursement contract may be used only when – (2) The contractor’s accounting system is adequate for determining costs applicable to the contract or order; and” Fixed Priced Contracts-Progress Payments Based On Costs FAR 52. 232 -16 – Progress Payments The Government will make progress payments to the contractor when requested as work progresses, but not more frequently than monthly amounts of $2, 500 or more approved by the Contracting Officer, Under the following conditions: (f) Control of costs and property. The Contractor shall maintain an accounting system and controls adequate for the proper administration of this clause. ” © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Why are you required to have a Compliant Government Contract Accounting System? Other Contract Types that Require Adequate Accounting Systems Fixed Ceiling Price Contracts with Retroactive Price Redetermination (FAR 16. 203 -3(b)) Fixed Price Incentive Contracts (16. 403 -1(c)(1)) © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com What is DFARS 252. 242 -7006 – Accounting System Administration? DFARS Subpart 242. 70 – Contract Business Systems DFARS 252. 242 -7006 – Accounting System Administration This clause is incorporated into all Do. D contracts that require an adequate accounting system. • The clause defines what is an “acceptable” system • The clause defines what is an “accounting system” • The clause defines the criteria for an accounting system (SF 1408). © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com What is a Compliant Government Contracting Accounting System? An accounting system that is acceptable for accumulating costs under a government contract that provides for the following areas defined in the SF 1408: o o o In accordance with the Generally Accepted Accounting Principles 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 Accumulation of costs under the general ledger control A timekeeping system that identifies employee’s labor by cost objectives A labor distribution system that charges direct or indirect labor to cost objectives Interim (at least monthly) determination of costs charged to a contract through routine posting of books Exclusion from costs charged to the government of amounts which are not allowable in terms of FAR Part 31 Identification of costs by contract line item and by units if required by proposed contract. Segregation of pre-production costs from production costs © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com In Accordance with § Defining Accounting Period (CAS 406) § Accrual Based (Accrued Expenses, Accrued PTO, etc. ) Matching Principle. § Capitalization and Depreciation (GAAP Based) § Cash Basis is not acceptable © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Proper Segregation of Direct Costs from Indirect Costs Developing a Chart of Accounts Sample Account Number Structure 100 Series – Assets 200 Series – Liabilities 300 Series – Equity 400 Series – Revenue 500 Series – Direct Costs (Direct Labor, Direct Materials) 600 Series – Intermediate Cost Pools (Fringe, Occupancy, etc. ) 700 Series – Overhead Cost Pools (Engineering, Manufacturing) 800 Series – G&A Cost Pools (Administrative, Marketing, IR&D, B&P) 900 Series – Other Income/Other Expenses © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Proper Segregation of Direct Costs from Indirect Costs Developing a Chart of Accounts Sample Direct Account Structure (Costs of Good Sold) 500 -01 – Direct Labor 500 -02 – Direct Material 500 -03 – Direct Travel 500 -04 – Other Direct Costs © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Proper Segregation of Direct Costs from Indirect Costs Sample Indirect Expense Account Structure (Expense Pools) 601 -00 – Fringe Benefits - 601 -01 – Vacation/PTO 602 -00 – Occupancy Costs - 602 -01 – Rent Expense 701 -00 – Engineering Overhead - 701 -01 – Indirect Labor 801 -00 – G&A Expenses - 801 -01 – Accounting Services © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Proper Segregation of Direct Costs from Indirect Costs Develop a Policy & Procedure on Chart of Accounts • • Account Number Structure Definition of Type of Expenses or Costs that go into the Account How a New Account is added to the Chart of Accounts Who has the Authority to Modify the Chart of Accounts © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Identification and Accumulation of Direct Costs by Contract Job Cost Ledger • The system must identify Direct Costs by Cost Element by Project • The Job Cost Ledger must reconcile back to the control account (i. e. Direct Labor, Direct Material, etc. ) • Distinct Job numbers for each Project © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Logical and Consistent Method for the Allocation of Indirect Costs Indirect Expense Rate Calculations • • Develop a Model or System to Calculate Indirect Expense Rates • Ties to Established Chart of Accounts • Shows Accounts that Make up Expense Pools • Shows Accounts that Make up the Allocation Base • Adjust for Unallowable Accounts Develop a Policy for Procedure on Indirect Expense Rates • Document the Company’s Definition of a Direct & Indirect Cost • Document Intermediate Costs Pools and Allocation Method • Document the Expense Pools and types of Expenses that go into the Expense Pools • Document the Composition of Accounts that make up the Allocation Base for Indirect Expenses © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Accumulation of Costs under General Ledger Control Subsidiary Ledgers of Accounts need to reconcile back to: General Ledger Control Accounts Job Cost Ledgers need to Reconcile to Direct Accounts in the General Ledger Expense Pools need to Reconcile to Indirect Expense Accounts in the General Ledger © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Timekeeping System that Identifies Employee’s Labor by Cost Objectives Single Most Important Item in Designing Your Accounting System Labor is usually the single largest cost driver for most contracts Labor charging is one of the highest risks for contract fraud Labor charging is one of the highest risks for employee errors © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Timekeeping System that Identifies Employee’s Labor by Cost Objectives Critical Elements in designing your Timekeeping System The Timecard (Paper vs. Electronic) Policy and Procedure on Timekeeping Employee Training © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Timekeeping System that Identifies Employee’s Labor by Cost Objectives The Timecard (Paper) • Only one preprinted timecard is prepared per employee period • The employee is in possession of the timecard • Employees prepare their timecards in ink, as work is performed • Timesheet is pre-coded with authorized project numbers • Employees record their time no less than daily • Corrections are make in ink, initialed and dated by employee and provide a relevant explanation • Employees and supervisors sign timesheets in accordance with procedures, verify and certify to accuracy © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Timekeeping System that Identifies Employee’s Labor by Cost Objectives The Timecard (Electronic) • System generates a new timesheet for each recording period • The employee is the only person able to login into the timesheet • Once time is recorded by the employee can only make the change to the timecard • Timesheet only allows for authorized project numbers • Employees record their time no less than daily • Corrections are tracked by system with date of change, reason for change, and who made the change • Employees sign timesheets electronically and time is locked for changes • Supervisors sign timesheets and cannot make changes to an employee’s timesheet © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Timekeeping System that Identifies Employee’s Labor by Cost Objectives The Timecard (Electronic) Software Solutions • • e. FAACT http: //www. efaact. com/ Clockwise http: //www. goclockwise. com/ • • Replicon http: //www. replicon. com/ Unanet https: //www. unanet. com/ © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Timekeeping System that Identifies Employee’s Labor by Cost Objectives Policy and Procedure for Timekeeping • Documents the Timekeeping Procedures for Company • Instructions for the Preparation of Timesheets • Instructions on how to correct Timesheet errors • Provides for the interval time to complete for labor activities • Completion and submission procedures for timesheets • Defines Employee Responsibilities for Timesheet Preparation • Defines Supervisor Responsibilities for Timesheet Preparation © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Timekeeping System that Identifies Employee’s Labor by Cost Objectives Employee Training • All Employees keep a copy of the Company Policy at their Workstation • Employee Orientation require training and Sign-Off for New Employee • Quarterly Training or Reminders on Importance of Timekeeping • Conduct Periodic Labor Floor-checks and Document Results © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com A Labor Distribution System that charges Direct or Indirect Labor to Cost Objectives • Allocates Labor based on Time Sheets for Payroll Period • Time Charges Reconcile to Individual Employee Timesheets • Payroll is Allocated and Reconciled to Direct and Indirect Charges of Employees • Direct Charges of Employees are further allocated by Projects © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Interim Determination of Costs Charged to a Contract through Routine Posting of Books Record expenses and costs to the books of accounts at least monthly © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31 • Establish Specific Unallowable Accounts in the Chart of Accounts • Policy and Procedure on Accounting for Unallowable Costs • Training for Employees in FAR Part 31 © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31 Establish Expressly Unallowable Accounts in the Chart of Accounts 809 – EXPRESSLY UNALLOWABLE ACCOUNTS 809 -01 – UN-Indirect Labor 809 -02 – UN-Advertising 809 -03 – UN-Bad Debt Expense 809 -04 – UN-Contributions 809 -05 – UN-Entertainment © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31 Policy and Procedure on Accounting for Unallowable Costs • Defines what is an Unallowable Cost • Defines what is a “Directly Associated” Unallowable Cost • Establishes the Expressly Unallowable Costs in the Chart of Accounts • Defines how Direct Unallowable Costs are Handled • Provides for a Screening Process of Unallowable Costs © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Exclusion from Costs Charged to Government Costs of Amounts which are not allowable per FAR Part 31 Training for Employees in FAR Part 31 • Trade Association Workshops and Meetings (NCMA, NDIA) • Internally developed Programs • Federal Publications Seminars http: //www. fedpubseminars. com/ • Public Contracting Institute http: //www. publiccontractinginstitute. com/ • Outside Consultants © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Identification of Costs by Contract Line Item and by Units if required by Proposed Contract The system can provide for sub-projects (i. e. CLINs, Task Orders, Sub-Tasks, etc. ) © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Segregation of Preproduction Costs from Production Costs The system can segregate costs related to preproduction Generally not seen at Small Businesses and R&D Contractors © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Software Solutions • • Quick. Books Pro e. FAACT (Quick. Books Integration) • • Jamis Microsoft Dynamics Solutions for Gov. Con • • Unanet Deltek Cost. Point DCAA does not Approve Software Packages DCAA determines “Adequacy” of Company’s Accounting System © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Best Practices • Develop a Simple Accounting Manual • Only put into place Politics & Procedures you actually intend to use • Constant Training on Timekeeping Practices to Staff • When in Doubt: “Document the Reason” • Don’t create an overly complex Chart of Accounts • The Simpler the Better (Easy to Provide and Overview to DCAA) © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Policies and Procedures (Minimum) • Chart of Accounts • Job Costing • Direct vs. Indirect Costs – Indirect Expense Rates • Timekeeping • Government Billing Process • Accounting for Unallowable Costs © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com What to Expect during a DCAA Pre-Award Accounting System Survey • • Entrance Conference (Introduction/Scope of Audit) Request for Initial Information (Chart of Accounts, Manuals, P&P’s) Fieldwork (Walk-Through and Demonstration of System) – 2 -4 Hours Follow-up Questions (Phone or Email) Draft Audit Report (Ability to Respond to any Conditions/Corrective Action Plan) Final Audit Report (Request Copy of Audit Report from ACO) Follow-up Audit on Corrective Action Plan (if required) © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Common DCAA Audit Findings • Not in Accordance with GAAP • No Policies and Procedures • No Timekeeping Process or Timecards • No Labor Distribution System • No Job Costing System • Chart of Account does not break out Direct vs. Indirect Costs • Unallowable Costs not identified in the Chart of Accounts © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Reference Materials • • • SF 1408 – “Preaward Survey of Prospective Contractor Accounting System” https: //www. gsa. gov/portal/forms/download/115778 DCAAM 7641. 90 – “DCAA Information for Contractors” http: //www. dcaa. mil/DCAAM_7641. 90. pdf DCAA Audit Program for Accounting System http: //www. dcaa. mil/sap/11070_AP_NA. pdf DCAA Audit Program for Preaward Survey of Prospective Contractor Accounting System http: //www. dcaa. mil/sap/17740_AP_NA. pdf DCAA Audit Program for Post Award System Audit at Nonmajor Contractors http: //www. dcaa. mil/sap/17741_AP_Post_Award_Acct_Sys. pdf © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com QUES TIONS Peter Witts, CPA pwitts@wittscpa. com (978) 957 -9665 x 102 © Copyright by Peter Witts CPA PC

70 Wilbur Street, Unit 3, Lowell MA 01851 (978) 957 -9665 www. wittscpa. com Need Further Help? Contact us to Schedule a Free Consultation. Contact us at: 70 Wilbur Street, Unit 3 Lowell, MA 01851 978 -957 -9665 pwitts@wittscpa. com