MISTAKE #2: NOT HAVING A FAR PART 31 COMPLIANT ACCOUNTING SYSTEM
When you receive a Phase II SBIR, STTR, RO1, BARDA, or ARPA-E grant or contract, you need to comply with the Federal Acquisition Regulation (FAR), specifically FAR 52.216-7. Of course, there are pitfalls along the way and not having a FAR-compliant accounting system is one of them.
After more than 30 years of specializing in government award accounting, we know the mistakes government awardees make, and how to prevent them. This 10-part blog series, “Top 10 Mistakes Government Awardees Make,” is designed to help you avoid trouble and protect your innovation and business.
SMALL GOVERNMENT CONTRACTORS MUST MAINTAIN FAR COMPLIANT ACCOUNTING RECORDS
It’s simple: When you receive a government award, you have to comply with the Federal Acquisition Regulation (FAR), and that means you must have a FAR-compliant accounting system.
A basic list of what a FAR-compliant accounting system should do:
- Segregate direct, indirect (F&A) and “unallowable” costs
- Accumulate direct costs by contract/grant budget category
- Allocate indirect costs (fringe and F&A rates) to intermediate and final cost objectives based on a “logical and consistent method”
- Reconcile the job-cost ledger with the general ledger
- Track employee time by job activity
- Charge direct and indirect labor costs to the appropriate accounts
- Produce monthly reports of charges to contracts & grants to support billings/draw downs
- Exclude unallowable costs
Federal funding agencies knows that if you don’t have an acceptable accounting system, you will not manage their funds properly or be able to report on those funds accurately. There’s also a greater chance that you will commit inadvertent fraud.
What’s more, not having an acceptable accounting system leads to management problems and increases the likelihood of business failure by a factor of five.
YOU NEED AN ACCEPTABLE ACCOUNTING SYSTEM BEFORE AN SBIR PHASE II
Because federal funding agencies know how pivotal it is for you to have an acceptable accounting system in place, most DCAA auditors will require you to demonstrate your accounting system before you receive an SBIR or STTR Phase II award. Here are two examples.
DoD – DCAA and the pre-award audit
Prior to receiving a DoD Phase II award, your contracting officer will require the Defense Contract Audit Agency (DCAA) perform a “pre-award audit”. This audit will include a thorough review of your chart of accounts and standard accounting processes to ensure that you have the ability to produce timely job cost reports at provisional indirect rates and have the discipline to continuously monitor your actual indirect rates to those provisional targets and take timely, corrective action as appropriate.
NIH is Very Similar – DFAS preforms a pre-award audit
When submitting an NIH Phase II proposal and requesting an F&A rate greater than the 40% safe rate, a grantee must submit an indirect rate projection as well as some historical financial information and proof of an acceptable accounting system to the Department of Financial Advisory Services (DFAS) – who are responsible for financial negotiations for NIH.
Clearly, it is worth your while to make sure you have a FAR compliant accounting system.
GET THE HELP YOU NEED
Talk to an SBIR award expert.
If you’re concerned about your accounting system, whether it’s compliant and how to make it that way, get the answers you need now. To talk to one of our government award accounting experts, contact Ryan ator 781.862.5170 ext. 2106
We have our own FAR-compliant accounting system, JamesonWorx. Basically, it combines QuickBooks Online and Microsoft Excel by using Microsoft Power BI and our own government award accounting expertise to create a remarkably transparent and affordable solution. To learn more about it, start with this blog and get more details in this one.
To learn more about FAR-compliant job cost reports, including indirect rate tracking, read this blog