Similar to how the technical work on a government contract has a particular flow of proposal to final deliverable the accounting also has a flow that has a beginning and an end. Although government accounting impacts the entire organization we are focusing just on the accounting that comes about from winning and executing a government contract.
The cost proposal is the start of the government accounting process. The cost proposal lays out your expected direct and indirect costs related to the proposed effort. The government will use it as a basis for a Billing Rate Audit, which will establish the percentage that can be added to direct costs related to execution of the contract to cover indirect costs.
For example, a lumber yard uses a $15,000 truck to make deliveries. The lumber yard delivered $1,000,000 worth of lumber with the truck over it’s lifetime. The indirect expense on the lumber would be $15,000 divided by $1,000,000 or 1.5%.
Now let’s say you proposed to deliver $10,000 worth of lumber for the government. The cost proposal would be:
|Cost of Lumber||$10,000|
|1.5% Indirect Cost||$150|
The government will conduct a Billing Rate Audit to confirm/establish your indirect billing rate of 1.5% for this overly simplified example.
In addition to the Billing Rate Audit the government will conduct an Accounting Systems Audit to ensure your accounting system is capable of tracking and separating costs among different projects in order to insure that the government pays the proper amount.
At this point, in the contract life cycle the government and you have established the proper rate to reimburse indirect expenses and that the accounting system that you will be using is acceptable to the government. Now it is time to execute on the contract which brings us to the phase of Incurred Costs.
The Incurred Cost phase is where you as the contractor track your indirect costs and then spread them over all of the work accomplished by the firm over a set period of time, usually one year. You will submit this information to the government and the government will audit it to determine where your actual indirect cost rate is compared to your Billing Rate.
After successfully completing the project, the government and you will wrap things up with Final Rate Negotiations and a Final Invoice. Which will lead to the close out of the contract and the end of the contract accounting life cycle.
In summary, the government contract will go through the following accounting life cycle:
- Cost Proposal
- Billing Rate Audit
- Accounting System Audit
- Incurred Cost Submittal
- Incurred Cost Audit
- Final Rate Negotiations
- Final Invoice