Government contractors need to have a specifically designed accounting system to be awarded certain contracts. They also need to pass the checklist items on the Pre-Award Survey Form SF1408. SF1408 is a checklist used by a Defense Contract Audit Agency (DCAA) auditor to determine if a government contractor has an acceptable accounting system to be awarded a cost-plus contract. Even if a government contractor is a subcontractor to a prime, they may need to pass the checklist items regardless of their contract.
On form SF1408, Section II – Evaluation Checklist, Item #2 states the government contractor’s accounting system needs to have proper segregation of direct and indirect costs. It also requires the identification and accumulation of direct costs by contract. To meet this requirement, government contractors need a proper chart of accounts to classify these costs into a direct or an indirect expense category.
First, let’s understand the importance of a chart of accounts. A chart of accounts is a list of general ledger accounts grouped by their function in an accounting system. These accounts may go into a balance sheet which contains assets, liabilities, and equity, or the profit and loss, which contains revenue and expenses. The chart of accounts is the foundation of an organized accounting system across all industries and organizations. Some examples of accounts are payroll, rent, travel, utilities, etc.
With government contractors, the organization of the chart of accounts has to be more customized to group direct costs and indirect costs. Having these additional groupings will help pass a DCAA audit and calculate indirect cost rates. Indirect cost rates can also be calculated to allocate indirect costs to a contract and see how profitable a government contractor is with these contracts.
Direct costs are defined by the Federal Acquisition Regulation (FAR, Section 2.1) as any costs which can be identified specifically with a final cost objective. A good way to determine this is to consider if the cost would be incurred if the specific contract did not exist. Some examples of direct costs are direct labor, direct materials, manufacturing supplies, and travel directly related to a contract.
Indirect costs are the expenses of doing business that are not tied to a particular grant, contract, or project function but are necessary for the general operation of an organization. Some examples of indirect costs are employee medical insurance, office rent, and general and administrative labor.
The best way to organize these costs is using a DCAA-compliant chart of accounts. In addition, a DCAA-compliant chart of accounts has cost pools that contain these direct and indirect expenses. Such as the direct cost pool which contains direct expenses, and indirect cost pools such as a fringe benefit pool, overhead pool, or general administrative pool which contains indirect expenses. The point of the indirect cost pool which contains a grouping of indirect expenses is to eventually allocate these expenses to a final cost objective, such as a contract.
Fortunately, with QuickBooks Online, you can develop your chart of accounts however you like. However, you will need to customize the chart of accounts for a government contractor. We have included a template that you can upload as a sample DCAA-compliant chart of accounts to use for your government contractor company.
You can see this chart of accounts has account numbers. It has pools in bold fonts and accounts in regular nonbold fonts. For example, you can see account number 70200, which is Office Rent goes under the account 70000 Facilities Expense pool.
Here is a helpful video on how to import the government contractor chart of accounts into QuickBooks Online.
We’re happy to discuss how to set up a chart of accounts for government contractors and any other financial concerns regarding government contracting. To set up a free consultation, please click on the button below to schedule a time that works best for you.