If you have a federally-funded award, it is subject to a complex set of rules known as the Federal Acquisition Regulations (FAR), as well as agency-specific regulations.
To help you understand the basics, set up a FAR-compliant accounting system properly, and better navigate the rules and regulations, we’ve created a comprehensive guide, “Understanding The Basic Accounting Requirements For Federal Government Awards”
This helpful, informative guide includes:
Need help maintaining a FAR Part 31-compliant accounting system? Call Now: 781-862-5170 – or – Schedule A Call
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Congratulations on receiving a federally funded award. Now comes the tricky part—managing the funds properly. To stay out of trouble and position yourself for additional funding down the road, you’ll need to make sure that your accounting system meets specialized Federal compliance requirements, including being able to demonstrate that your indirect cost allocation methodology is fair and equitable, and can survive government audits.
When you receive a grant or contract from the United States government, you are entering into a business relationship with the largest purchaser of goods and services in the world. One that is highly sophisticated, with written and unwritten rules and expectations, and stiff consequences when not satisfied.
In general, the government will purchase goods and services by one of three methods.
On a fixed price basis. For example, contractors sell commercially available items to the government though the General Services Administration (GSA) schedule or Other Transaction Authorities (OTAs).
On a time and materials basis. For example, services can be contracted by specific government agency at a fixed hourly rate and may be subject to a Service Contract Act.
On a cost-reimbursable basis. For example, Research and Development (R & D) and projects that have potential, but no satisfactory existing commercially-viable solutions.
This whitepaper will provide a high-level overview of the specialized accounting required of cost- reimbursable awards so you can make informed decisions about the proper oversight of your accounting system. Regardless of whether you’ve received contract or grant funding, this whitepaper will use the “grant award” vernacular, as we will be discussing basic concepts required by both types of funding vehicles. In general, cost-reimbursable awards require your accounting system to comply with Federal Acquisition Regulation (FAR) Part 31 and 45 CFR 75, sub part E.
Cost-reimbursable awards come from a variety of agencies, in a number of sizes, and with standard and unique reporting requirements. If you have a federal contract or grant containing FAR clause 52.216-7 Allowable Costs, the award is a cost-reimbursable-type funding vehicle. In a DoD contract, this clause is easy to spot in a 2 or 3 page list of FAR clauses that your award is subject to–in a document that is typically 30 pages or longer.
For NIH and DOE grants, this clause is trickier to find. A Notice of Grant Award (NOA) typically comes as a 3 or 4 page PDF which takes you to the specific agency’s supplemental regulations.
As an example, NIH Award term and conditions are embedded in a hyperlink to http://grants.nih. gov which ultimately takes you to 45 CFR 75, subpart E. DoE Awards drive you to ecfr.gov. These cost-reimbursable awards are typically subject to three levels of regulations:
Level 1
If you’ve received one of these awards, you’ll need to establish an acceptable accounting system and maintain it in an “always audit-ready” manner. Regardless of the exact type of federal award vehicle, all are subject to the accounting and administrative requirements and guidance contained in the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).
Level 2
Each government agency has the right to issue its own supplemental regulations. The Department of Defense, National Institutes of Health, and Department of Energy all have substantial supplemental regulations.
Level 3
Different types of program awards may carry specialized funding vehicle regulations. As an example, the SBIR program requires certain ownership requirements, and the Principal Investigator (PI) must be primarily employed from the entity receiving the award. ARPA-E’s typically carry cost-sharing requirements that are generally not found in SBIRs.
As a basic overview, this whitepaper only addresses “Level 1” subject matter—general overview accounting and administrative requirements required by the FAR and CAS.
The Bottom Line
The government is willing to pay for all fair and reasonable costs within the constraints of their guidelines. In general, you will need to know whether a cost is allowable (as a direct or indirect expense) or unallowable. You will need to set up and maintain an acceptable accounting system. And it is your responsibility to keep meticulous supporting documentation in order to demonstrate your accumulated project costs to a government auditor.
The following types of program awards almost always have FAR 52.216-7 embedded in the terms and conditions of their award:
When the technical specifications of the work to be done can’t be clearly defined, as is the case with the majority of R & D projects, the government will typically use a cost-reimbursable award vehicle. This is considered a high-risk “level of effort” contract because the government will pay the awardee’s cost of performance whether the outcome of the project is satisfactory or not.
In most businesses, the higher the risk, the greater the need for oversight. The same is true of the government. If you have a cost-reimbursable award, you need to understand which regulations apply to your situation—there are literally thousands of pages. More important, the government does not protect your interests. You do.
Is it important to understand that with cost-type awards the government has financial recourse back to you until all audits are done and the project is closed-out. Getting this wrong can be extremely expensive.
Setting Up Your Accounting System
While some of our clients require more sophisticated systems, low-cost, off-the-shelf software packages such as QuickBooks Online help satisfy the basic accounting requirements that your government award demands. With a little bit of tweaking, the first key to using this software compliantly, is to properly set up the chart of accounts. This will mean a little bit of tweaking because, unfortunately, there isn’t a “government contracting” standard chart of account option in QuickBooks online software. We offer the JamesonWorx Phase I Solution which includes a basic, starter-level chart of accounts, and the training and reporting capabilities you will need.
Setting Up the Right Chart of Accounts
Your chart of accounts is a list of all the accounts used to organize your business financial activity into different groupings of assets, liabilities, income and expenses. The numbering of your accounts is strongly recommended as it creates a simple, consistent cost coding language, and assists in creating a cost charging language throughout your organization. If set up correctly, your chart of accounts will streamline your ability to accumulate and report on costs, and save you hours of guesswork and headaches hunting down explanations from your employees.
Your monthly government billings and annual incurred cost submission are generated from detailed, concise job cost reports. The chart of accounts forms the foundation for gathering all this information. When the government auditors arrive, your paperwork needs to clearly document the expense incurred, and the supporting documents must authenticate the transaction and approval process. Being audited is not storytelling time or a time to fumble around looking for answers!
Manage Your Expense Charge Coding and Documentation
The next step in demonstrating your acceptable accounting system to a government auditor is the ongoing ability to segregate the expenses in your general ledger as either Allowable (government will reimburse you for these) or Unallowable (they will not.)
Allowable Costs
Any costs for goods or services that are specifically and only for the benefit of ONE government (or commercial) project, such as:
Direct Labor: As an example, the cost of several hours that an engineer spends performing an experiment that benefits one specific project
Direct Materials
Direct Subcontractor Costs
Any costs for goods or services that benefit multiple projects are indirect expenditures such as:
Utilities
Indirect labor, including vacation, holiday and sick time
Administrative labor costs
Accounting fees
Telephone and internet expenses
Rent (assuming you don’t have specialized facilities)
Some legal fees
Unallowable Costs
Expenses that the government specifically will not reimburse you for as they do not derive benefit from these costs. Examples include, but are not limited to:
Alcohol
First class travel (costs in excess of per diems)
Federal income taxes
Donations
Fines, penalties, late fees
The classification and coding of expenses are critical and can be confusing at times. While some costs are black and white, others may fall into gray areas. In these situations, a good line of reasoning is to ask yourself:
If it weren’t for this project, would we have incurred this expense?
Which projects benefit from incurring this expense?
In general, costs that only benefit a specific project are direct expenses and costs that benefit “the business” are indirect expenses. Our experience shows that 98.3% of new grantees and contractors dramatically underestimate their indirect costs. More important, they fail to understand that the government prefers to do business with companies who continue to advance their resources and solutions. (Which requires you to not shortchange your infastructure.)
Keeping Close Track Of Labor Costs—Timesheets Are Mandatory.
Labor costs are usually THE largest expense for R & D projects. This is not lost on the government. As such, the government mandates that every employee who works in your company that you charge the government for, either directly or indirectly, needs to maintain a timesheet. These timesheets must include all of the active projects that your employees are working on, both government and commercial, as well as charge categories to account for indirect labor, such as vacation, holidays, sick and administrative time.
It is also a FAR requirement for your company to have the following written timekeeping policy:
Timesheets must be prepared in ink
Employees must record all time spent (even if in excess of 40 hours/week)
Employee must sign off on all timesheets and must get their supervisor’s approval
Any corrections must be handled as follows–do not erase anything, draw a line through any errors and write in the correct information, initial and date the correction
In practice, your time-tracking system can be either manual (paper) or electronic. The government doesn’t make blanket approvals for commercially-available electronic time-keeping systems. However, to be considered acceptable by a government auditor, an electronic system must provide a date-stamped audit log for all data entry including changes and approvals—which effectively creates a forensic trail.
Obviously, the government doesn’t want anyone to manipulate the employee’s actual labor costs.
When grantees are just getting their business started we typically advise them to simply pay themselves an hourly rate for all their recorded time. Paying salaries introduces the possibility of uncompensated overtime, which can complicate matters. Checkout our blog series on this topic.
Job Cost Reporting
All of your expenses must be accumulated in your general ledger (with the assistance of a good chart of accounts) and must reconcile with your job cost reports, a form of subsidiary (or additional) ledger. Job cost reports are critical for internal decision making, as well as external reporting requirements and will:
Act as support for billing the government for incremental monthly project costs accumulated
Be used to report cumulative spending by budget category to your customers which they use to monitor against technical progress achieved on the goals of the project
Provide a signal to management when to wrap up a project to prevent overspending
Indirect Cost Reports
Indirect costs come from expenses that relate to your overall business, which aren’t incrementally caused by specific projects. They include electricity, rent, accounting and telephone expenses. These costs indirectly benefit all of your projects and need to be proportionally allocated, charged and “paid for” by all of your projects—government and commercial alike. If they all benefit from the rent, they should all pay for it.
All projects pay for these costs via an indirect cost recovery rate. Your indirect cost rate recovery methodology is what you believe to be the most fair and equitable way to proportionally charge these costs to all your customers on an ongoing basis. Once per year, the government requires you to prepare an incurred cost submission or “true up “ report, which reconciles provisional monthly indirect cost rate charges with actual indirect expenses.
Just because a government agency creates a cost proposal template in a certain terminology format does not mean you must adhere to their format! You need to determine the best methodology for recovering your indirect costs—especially if you are doing business with multiple agencies. We are typically advocates for keeping it as simple as possible.
Different government agencies will refer to indirect costs using slightly different terminology- fringe, fringe and F&A rates, overhead rates, overhead and G&A rates. These terms and their prescribed use in cost proposal forms are nothing more than methodology nomenclature common to that agency.
98.3% Underestimate Their Indirect Cost Rate
The indirect cost recovery rate that you propose to the government should represent the indirect costs that you need to fairly reimburse yourself for indirect expenses—that is your right. However, many companies underestimate this rate when they propose projects and do not charge the government anything resembling their actual rates because the competition for government funding is intense. We also frequently hear “we want to spend as much money as possible on direct cost that can develop the technology,” which is admirable.
While undercharging the government for indirect expenses is legal, it is expensive as it leads to guaranteed project cost losses that need to be paid for somehow, and it may or may not be a good strategic idea. (The government will certainly not stop you from giving them a good deal. Conversely, if you overbill them they will require swift repayment of the overbilling.) If you do not have equity backing or an extremely profitable commercial revenue stream, undercharging for your actual indirect costs can be a swift and for certain real road to financial ruin.
Cost-reimbursable Awards Mean Annual Incurred Cost Submissions
Regardless of whether you ask for an indirect rate that is too low out of gallantry, cowardice, or a purposeful strategic management decision—you are never excused from calculating your actual indirect rates on an annual basis or properly reporting them. Each government agency has a slightly different approach to indirect cost rate negotiations. However, the annual incurred cost submission is one of the key historic reports used to negotiate your final indirect cost rate.
The presence of FAR 52.216-7 in the terms and conditions of your contract or notice of grant award means you have a cost-reimbursable award. When you initially propose the project, you request an indirect cost rate in order to provisionally (temporarily) invoice the government on a monthly basis. The annual incurred cost submission is effectively a true-up report you must prepare which shows how you calculate your final, actual indirect cost rate. Once submitted you are required to reimburse the government for any indirect costs overbilled.
Each agency has slightly different Incurred Cost Submission reporting requirements. To under- stand how involved this report is, please visit DoD page under the Agency Compliance section of our website or click here. In addition, we’ve highlighted variations in the reporting requirements on the NIH and DoE webpages.
Government Audits
Poor audit outcomes can result in delays in paying invoices, termination and repatriation of funding and, in the worst case, criminal and civil indictments. The depth of this topic is far too complex for this basic white paper. We’ve created an additional white paper titled, “Understanding the Strings Attached to Your Grant Award” for grant awardees which can be downloaded at www.jamesoncpa.com.
When you think accounting and audits, you probably think of your CPA. In general, CPAs are highly-educated licensed individuals who are well-versed in Generally Accepted Accounting Principles (GAAP). Today, becoming a CPA generally requires a Masters’ degree, passing a multi- day uniform exam, and at least two years of public accounting experience.
GAAP is the underlying business language used to produce financial statements. GAAP financial statements are used internally by management in making short and long-term decisions and improving business performance, and externally by investors and creditors in making investing and lending decisions. GAAP provides guidance on accounting for routine and non-routine transactions such as revenue recognition. A strong understanding of GAAP is fundamental to government grants and contract accounting.
The Internal Revenue Code, on the other hand, is the framework for corporate and individual income tax regulations. It is critical to a business. Because of this, management frequently turns to their tax CPA first. Tax knowledge, however, is almost completely irrelevant to working with the cost accounting standards of Federal Acquisition Regulations.
What level of accountant do you need?
Whether you decide to outsource your accounting or do it in-house, there are expenses involved. Accounting compensation is driven by years of experience, specialized knowledge certifications and location.
Below you’ll find salaries for various accounting positions based on figures from salary.com median pay ranges; if you want a superstar, be prepared to pay in the 80th -90th percentiles. Depending on your location, these amounts need to be adjusted up or down based on the cost-of- living adjustment for your location. As an example, if you are in New York City or San Francisco and want someone physically present, be prepared to add 40% for a cost-of-living adjustment.
Additionally, if you fill this role with an employee, rather than a contractor, budget an additional 25-39% for benefits—depending on how generous your benefits package needs to be to find qualified people.
Bookkeeper and administrative types with an Associate’s Degree can typically pay bills and process routine transactions. They’re usually paid $35-$60 per hour depending on experience and can be quite adequate in businesses with revenues of less than $5M. For most of our clients of this size, QuickBooks Online experience will be essential.
Full-charge accountants with a Bachelor’s of Science Degree in Accountancy become more appropriate when the volume and complexity of transactions within the business increase, typically to $3-$10M per year. Salaries usually range from $80,000 to $100,000 per year (plus benefits) for this level of expertise. However, the complexity of any commercial operations and need to interact regularly with customers, VCs, or board members could challenge this level of expertise in smaller businesses. What’s more, while degreed accountants tend to be good at maintaining a GAAP set of books and can be taught most routine accounting duties, they don’t know what they don’t know.
Accounting Controllers usually have five to seven years of experience. Still, they may struggle when working in unfamiliar territory. Salaries range from $100,000 to $125,000 per year. Add the comfort factor provided by the CPA license certification and the reduced risk can push the salary to $120,000 to $160,000 (plus benefits). These individuals typically become essential when revenues hit $10M or the demands of customers, VC boards, or commercial operations dictates.
Chief Financial Officer (CFO): Publically-traded companies, or companies with significant outside investor relations and board oversight, tend to dictate the need for this level of person, who will command a minimum of $200,000 to $250,000 per year (plus benefits) and will have at least 10 to 15 years of related experience. CFOs can do it all and tend to stick to mission-critical issues and oversee a staff to perform the rest.
A. Degreed accountants tend to be good at maintaining a GAAP set of books and can be taught most routine accounting duties, but don’t know what they don’t know.
B. Controllers are more sophisticated than degreed accountants, but may still struggle when outside their comfort zone.
CFO’s can do it all tend to stick to mission critical issues and oversee a staff to perform the rest.
Do You Have The Right Kind Of CPA?
Government contract and grant accounting is a rare specialty and, in truth, is outside the realm of knowledge of an ordinary CPA. It is not something an accountant would learn in school, nor is it covered in the Uniform CPA Examination.
At Jameson, our Account Managers are typically CPAs with 15+ years of public accounting experience and they usually need about 5,000 to 6,000 hours of government award management experience with us before we will let them represent a client during a government audit without a supervisor present. The stakes are just too high!
How To Tell If Your Accountant Is Qualified to Handle Your Needs
While knowledge of GAAP is the baseline for applying the specialized rules of FAR, it is only the beginning. There are many nuances to FAR accounting that can only be learned in the trenches. To see the person overseeing your financial relationship with the federal government is qualified, asking the following:
Do you know what the salary cap is for our funding agency? While the exact number generally changes annually, not having a rough idea– without looking it up– is very telling.
How many indirect cost rates have you negotiated? Final indirect cost rates are negotiated during the government’s audit of your Incurred Cost Submission. Would you pick a knee surgeon for your operation who only had three successful operations or would you prefer someone who has performed hundreds?
How do the indirect cost rates we use in our proposals compare with the industry? For the answer to this question, see the Resources section of our website.
Yes, there are all sorts of competent individuals who can help you with your business. But the question remains, are they qualified to help you with your government contract and grant accounting? And what is the most cost effective mix?
Receiving a cost-reimbursable award can be a real game changer. But there are strings attached in the form of reporting and accounting requirements specified in the Federal Acquisition Regulations and Cost Accounting Standards.
There are also requirements which are unique to different government agencies, and even the different types of funding vehicles. Audit findings, penalties, future funding, even the original award itself is riding on your accounting practices, so you have to get it right.
To avoid expensive surprises, find an expert with a proven track record of working with government grants and contracts. Whether you decide to handle the accounting in house or outsource, make sure the person who oversees the care of your books and records, and represents you during these government audits understands the rigors of this type of accounting.
Jameson & Company CPAs deliver proven accounting services custom designed for entrepreneurs who have been awarded Federal contracts and grants with annual revenues of up to $10 Million. We provide the skills and processes you must have to maintain a FAR compliant accounting system. We’ve successfully represented clients during thousands of DCAA audits, NIH indirect rate negotiations and audits by other government agencies. We manage your accounting system so you have more time to innovate. We’ve helped clients manage over $4 billion in Federal awards – fairly, cost effectively, from coast to coast.
