Doing business as a government contractor presents tremendous opportunities – along with a commitment to be compliant with DCAA, CAS, and FAR financial regulations. Audits of financial records, protocols, and processes help ensure operational and reporting compliance. Any discrepancies could yield penalties, or worse, loss of revenue-generating contracts.
As part of the Federal requirements for government contractors, those financial regulations address the subject of “unallowable” expenses. For example, DCAA primarily uses Memorandum for Regional Directors (MRD) to distribute audit alerts potentially inspired because of litigation or set precedents to help establish the new audit path to follow. The DCAA issued MRDs on determining expressly allowable costs (14-PAC-021), within which are 32 pages of cost principle excerpts to provide auditors with a tool that directs them on questionable expenses. Either “direct or unmistakable terms” expresses whether or not a cost is permissible.
Now, the fact that the cost principle does not include the word “unallowable” or phrase “not allowable” does not mean that the costs in question are not expressly unallowable. Unfortunately, instead, audit teams must determine whether the cost principle, used as a basis for questioning the costs, explicitly identifies unallowable costs. And deciding whether costs are expressly unallowable is more of a challenge and open to interpretation and varying opinions.
What should government contractors do about this? A good offense is a great defense, meaning that government contractors should establish standard operating procedures and policies across their organization to ensure consistency in meeting government regulations. Further, automation for these policies is available in a reliable accounting system with rules that keep designated expressly unallowable costs separate from all other expenses.
Costs can be segregated by division, project, and type of expense. Government contractors should further consider building governors in their system to limit general ledger (GL) accounts and activity. Taking this type of action can eliminate the reclassification of unallowable expenses. It does so by reducing the time spent on reclassification as well as the potential for human error.
Four Ways the Right Software Can Help You Be Compliant
This is where a well-designed software system for government contractors can handle classifying “unallowable” costs upfront. Specifically, Microsoft solutions provide several different ways to account for unallowable costs accurately.
For example, the company’s chart of accounts can have a separate range for unallowable costs, which means unallowable costs can be easily distinguished from unallowable costs in the general ledger. You can take that even further by allowing increased segregation of unallowable costs against specific Jobs, Tasks, and Departments without risking the accidental billing of those costs to government clients.
There are several tools you can use to make sure such expenses get booked to the right place(s):
1. Set Up Labor and Expense Categories
You can set up Labor and Expense categories mapped out to specific general ledger account, then place a group of categories into a bucket called a Job Account Group. When you assign a particular Job Account Group to a job, you restrict the categories users can select on timesheets, expense reports, and purchase invoices. If there is an expense category for Unallowable Alcohol that is accessible on expense reports, for example, users can charge the unallowable costs upfront.
2. Create Tasks Within a Project
You can create tasks within a project that map to unallowable cost accounts and give users the ability to select those tasks on their timesheets so that those costs are classified upon timesheet submission. Naturally, you can design approval hierarchy structures, such as organizational and project-specific, to ensure timesheets, expense reports, and requisitions go through the proper channels before hitting the books. You can use a WorkFlow engine, a user-friendly visual tool, to design these types of workflows.
3. Use the Per Diem Wizard
Another way to reduce the risk of misclassifying unallowable travel per diem costs is by using the Per Diem Wizard in the Web Time and Expense System. You can upload the GSA and State Department Per Diem Rates into a database. Then users can select their CONUS or OCONUS per diem locations, which then automatically selects the correct M&IE and Lodging Rates from the options provided. From there, the user keys in the actual lodging rates and the amount over per diem will automatically code to an unallowable expense code.
The system will also automatically reduce M&IE allowances on the first and last day of travel to 75% of the total, as well as for meals furnished on government site. These controls help make sure that DCAA will not flag your company for unallowable travel expenses later.
4. Use the Automated Project Allocation Function
FAR, 31.201-6, requires costs directly associated with unallowable costs to also be excluded from billings to the government, including indirect burdens on unallowable costs. Government contractors that remove those associated burdens from billing pools can take a lot of time and lead to human error. By setting the automated system to segregate unallowable costs onto a separate Job Task, associated indirect cost burdens will hit the same WBS code when running the Project Allocation function.
Even with all the above in place, some unallowable costs may still slip through and get misclassified. The good news is that XTIVIA offers many projects reporting solutions that can help identify these costs before they hit your Incurred Cost Submission. Our services include Project Managers having access to analyze Project Costs and Accounting Managers being able to review Bookings by Job, Job Detail, and Labor Analysis Reports, as well as other self-service reporting options, like using Excel on the front-end to catch stand-out costs. Users can also build custom reports off Job Data to identify outlier costs while end users can create ad hoc reports with the ability to drill down from a higher level, such as a divisional level down to a contract or project manager portfolio.
Let XTIVIA Help You
Altogether, the most effective way to avoid penalties for non-compliance is to be compliant with DCAA, CAS, and FAR regulations. Having the right Microsoft solution in place, whether that is Microsoft Dynamics 365 Business Central, Microsoft Dynamics NAV, Microsoft Dynamics AX, or even Power BI for visually-friendly reports, helps you streamline and automate the process of being compliant. That can not only save potential penalties but also help your company be awarded new business by being transparent, knowledgeable, and straightforward in your reporting.
Need more information about which Microsoft solution can help? Talk with one of XTIVIA‘s trusted advisors today.