MISTAKE #3: OVERSPENDING ON DIRECT COSTS
When you receive a Phase II SBIR, STTR, RO1, BARDA, ARPA-E or BAA 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. Overspending on Direct Costs 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.
OVERSPENDING ON DIRECT COSTS AND LOSING MONEY
There two main reasons why a grantee or contractor overspends on direct costs.
- You didn’t adequately plan for real life when you budgeted direct costs. Perhaps you are trying to do too much with the limited funding that you have.
- Poor accounting practices and internal controls.
HOW POOR ACCOUNTING PRACTICES AND INTERNAL CONTROLS LEAD TO OVERSPENDING
In our experience, the main reason projects have unplanned, direct cost overruns is poor accounting practices.
Here are the poor accounting practices we see most often, and how to fix them.
|Delay in collecting and entering employee timesheets means staff continues to charge for a job that no longer has money||Create and enforce a timesheet process that includes weekly (or daily) collection and entering.|
|Failure to control subcontractor or consultants and untimely invoicing||Make sure your subcontractor and consultant agreements include pertinent details such as scope of work, financial terms, and invoice deadlines. Universities are notoriously slow at invoicing, so nudge them frequently to decrease surprises. If managed too loosely, some consultants blur the line between formal and informal requests. Insisting on a bi-monthly invoice decreases scope creep.|
|Too many people with spending authority leads to a lack of control over purchase orders.||This is another internal control issue. Set up a system for POs that includes the specific person or people who have approval authority. Ideally, 1 person controls the budget on each project.|
|Because the monthly closing takes too long, management reports that would reflect overspending are too late.||Create and enforce systems for timely monthly closings, reconciliation and reporting.|
WHAT HAPPENS IF YOU OVERSPEND ON YOUR DIRECT COSTS?
You really only have two options:
- Option 1. If there’s a valid reason for overspending, such as a structural change or an unexpected and unavoidable change in costs, you may be able to go back to your government customer and negotiate for additional funding.
- Option 2. Once you recognize that you may be overspending on a project, it’s important to sit down and re-budget. Re-evaluate your desired outcome and quickly make changes to reduce your spending.
GET THE HELP YOU NEED
Talk to an expert.
If you’re concerned about your direct costs and how to get them under control, do not wait until the end of the year to address it. You need to make steps now to solve the situation.
To talk to one of our government award accounting experts, contact Ryan at firstname.lastname@example.org or 781.862.5170 ext. 2106
Learn more about another common mistake, Overspending on Indirect Cost Rates.
Attend an informative webinar. We offer a free hour-long webinar on government award accounting nearly every month. You’ll find the schedule and more information here.
To learn more our FAR-compliant accounting system, JamesonWorx, read our blog