Many companies would rather avoid the cost and complexity of maintaining a compliant accounting system. Instead, they choose to operate exclusively in a fixed-price contract environment, steering clear of cost-type proposals. But even if you never expect DCAA to audit your accounting system, several elements of a compliant system can strengthen the financial health of your company by giving you greater visibility into your finances.
Segregation of Costs
Segregation of direct costs by project. One of the fundamental elements of a compliant accounting system is the requirement to separate direct costs from indirect costs, then break those direct costs down further by project, CLIN, SLIN, and so on. This allows you to isolate costs specific to each project and its work breakdown structure—and, in turn, measure each project's performance.
By capturing both revenue and direct costs, you can see the gross margin for every project. You can also compare actual costs incurred against proposed costs for added insight. Once you understand each project's costs and profitability, you can take targeted actions to improve its financial performance, which strengthens the company's overall financial health.
Segregation of indirect costs by cost pool. This is another critical element of sound financial management. Indirect costs make up a significant portion of a project's proposed costs. By capturing indirect costs by cost pool and calculating indirect rates, you can measure your performance against your proposed rates.
If your actual indirect rates are running higher than proposed, you can drill deeper to determine the cause of the overrun. If they're running lower, it's worth understanding why, to confirm that every cost has been accounted for properly.
Segregation of unallowable costs. This is equally important. Unallowable costs can be a normal part of doing business, much like interest expense, but they need to be managed carefully—because they come directly out of profit. Creating a monthly metric to track unallowable costs helps you monitor and, ideally, minimize them.
Limitation of Cost and Funding
Under a fixed-price contract, you know the total amount to be billed. But if the contract is incrementally funded, it's important to monitor the funding ceiling to avoid billing over the funded value. Billing beyond that value can delay payment and create a cash flow problem. Whether you're tracking contract value or funded value, you need to know exactly where each project stands against both.
Policies and Procedures
Current policies and procedures do more than check a box for an audit. They serve as clear guidelines for your finance team as they carry out their work. Policies for areas like timekeeping and travel act as guardrails, ensuring employees report their labor and travel correctly and consistently.
The Bottom Line
The perception that a compliant accounting system is costly and cumbersome is easily outweighed by the benefits certain elements deliver. Capturing costs by project lets you measure the financial performance of each individual project. Segregating and managing both indirect and unallowable costs is equally important to protecting profitability. And solid policies and procedures provide the guidelines that keep every area in alignment.
Ready to put a stronger accounting foundation to work for your business? PCI's Managed Accounting Services give government contractors the financial infrastructure, compliance-ready systems, and real-time visibility they need to operate with confidence — without the overhead of building it in-house. Partner with PCI and turn your accounting complexity into peace of mind.
