Cost And Accounting, Running Your Business

The Costs Must Go Somewhere

Good morning,

To follow up on our discussion yesterday about the markups, overhead, and G&A.

In 2017, we had 13.422M in subcontractor revenue we billed as the prime against 12.254M in direct costs for a gross profit of 1.167M or 8.7%.

In 2017 G&A expenses made up 10.97% against the direct costs and associated fringe benefits (allocation method referred to as Total Cost Input (TCI)).

When the G&A costs are allocated against the subcontractor costs the net profit disappears on the subcontracts. The 1.167M drops to a loss of -177k,  the 8.7% gross profit is reduced to a loss of -1.32% on the net profit.

The natural question that arises in cost allocation is what happens if we do not allocate the G&A to the subcontractors. This is a common demand from program managers and government contracting officers.

G&A simply cannot disappear, it has to has to go somewhere. The next common method of allocation most contractors often think of is to burden Direct Labor and its associated fringe with the G&A.

While in 2017, using the approved TCI method above that resulted in a financial loss on our use of subcontractors, the same TCI method resulted in a profit on direct labor. We had a 24.69% net income on Direct Labor and associated fringe. There was 4.638M in direct labor revenue against 3.148M in direct labor costs to include fringe for a gross profit of 1.491M. When the G&A is allocated utilizing the TCI method the net profit is 1.145M or 24.69% profit.

At first glance you may wonder why there is a difference in profitability. The difference occurs due to differences in revenue (billing) not costs. We have overall higher billing on our labor costs as compared to our minimal and unprofitable markup on subcontractor costs.

If you shift the G&A from subcontractors to direct labor you get back the 1.167M in profits on the subcontractors but the profit on direct labor vanishes and moves to the negative, a loss of -7.85% is created for negative -364k from the positive 1.145M.

Again, the G&A costs must go somewhere, and the government is perfectly willing to negotiate us into bankruptcy.

Despite the objections from the programs and contract people, Total Cost Input is the regulatory defined de facto method of cost allocation. Changing allocation method does not eliminate costs, it only moves them somewhere else. Again, the costs have to go somewhere.

 

 

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DCAA Relations, Incurred Cost Proposals

Contractor Rights Expanded

Let DCAA speak for itself…..

 

This memorandum is being issued to confirm that Agency policy will be revised to require incurred cost submissions to be reviewed for adequacy within 60 days of receipt, as required by the 2018 NDAA enacted on December 12, 2017. The DCAA CAM will be updated to reflect this requirement. Therefore, for any incurred cost submission received since December 12, 2017, the audit team must complete the adequacy review and notify the contractor of the results of the adequacy review within 60 days.

Another important aspect of the NDAA requirement is completing incurred cost assignments within 12 months of receiving a qualified submission after the date of enactment (December 12, 2017).

http://www.dcaa.mil/content/Documents/mmr/18-PIC-001.pdf

 

 

 

 

 

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DCAA Relations, Incurred Cost Proposals

Survivors of the 2008 DCAA Crisis are Now Supervisors…..

A DCAA auditor recently contacted a client with a concern about their incurred cost submission for 2014, The auditor asked the following (contract information redacted):

“Inquiries:
1) In comparing on Schedule I to Schedule H, Schedule I, cell G30 ($38,287) and Schedule H, cell P36 ($34,579) are both values for FYE 2014 Costs, Subcontract XXXXXXXXXX. What accounts for the difference between these two numbers?”

If you could not guess, this was the T&M section of the Schedule I. This section of the Schedule I records the government’s costs while the section referred to in the Schedule H records the contractor’s costs. Under any reasonable circumstances they should not tie. A careful reading of DCAA’s own adequacy checklist confirms this (link to Schedule K not H).

Answering this type of question is a conversation I try to have over the telephone or in person. I avoid putting our response in writing due to the fear of focusing the adequacy discussion on the government and not the contractor.

I telephoned the auditor and she immediately agreed with my response but insisted that I reply in writing to provide a record of the response. This is when I guessed that the question originated with her supervisor and not herself. Apparently, a supervisor who survived the DCAA Internal 2008 Adequacy Crisis and is now a supervisor.

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Accounting System, Cost And Accounting, Department of Defense News, Running Your Business

A World Without DCAA hits SBIR Phase One

Here are some of the requirements from the Department of Homeland Security’s latest SBIR  RFPs

 

“Additional deliverables in this phase include the following (templates to be provided later by the federal Program Manager):

  • Monthly Status Reports, including master schedule for Phase II activities, quad chart, table showing each task description, percentage completed, targeted completion date, revised dates (if applies), etc.
  • Monthly Financial Status Report showing reporting month, cumulative costs, allocated financial data for direct labor categories, labor hours, labor rates, consultants/subcontractors cost, travel, materials purchased, etc.
  • Monthly status calls “

Section A-5

https://www.fbo.gov/index?s=opportunity&mode=form&id=41268594cdfdef40295cae324d0b2abe&tab=core&_cview=1

I recently participated in a Navy SBIR conference where one of the other panelists encouraged contractors not to worry about the budgets on their SBIR Phase One. It appears that may no longer be the case.

I had a dim memory of the DOD program staff asking for similar reports years ago. I went to look and found one form so old that I cringed at the title: “Fund Man Hours Expenditures”. I imagine an updated version of this is in many small business contractor’s futures.

All of this underlines the importance of doing it right from the start. Contractors starting out should start out with a cost accounting system that will meet their needs and the government requirements.

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Accounting System, Department of Defense News, Running Your Business

DFARS Cyber Security for Small Business Contractors

In 1998, I listened to an IT staff member from a large contractor proceed to chew out the contractor’s accounting staff for ‘losing’ a folder stored on the company’s servers containing all of the year-end closing work. He proceeds to call the staff “idiots” and ignorant while glossing over the fact that the IT department’s backup of the critical data had failed the night before.

He noticed my smile and could not decide if I was agreeing with him or laughing at him, so he asked me what the F**K I was smiling about. I replied,

“I want to thank you. For years people have criticized accountants as being unresponsive to the company’s needs, speaking a language no one else understands, and not really caring about the success of the company. People now say this about IT people instead”.

A few weeks later a software consultant, with full access to all of the IT systems, destroyed the company’s general ledger by using direct access to the database to create new balances in 146 general ledger accounts. The consultant then spent months trying to fix the error while hiding it from the company. Nine months later, one of the company’s employees printed out a general ledger report that showed a WIP balance of a little over two million dollars while the subsidiary ledger showed an amount several times larger.

What saved us was the trial balance that I had printed out the day before the consultant screwed up the general ledger. I took the printout with me as a resource for my work for them with DCAA.

As a result of this lesson, and too many others, I started asking myself twenty years ago about the relationship between accounting and IT.  Part of my thinking can be seen in the name I chose for my later technology company: “Accountable Technologies”. I would love to say that Edward Snowden was the final nail in the coffin, but there are thousands of accidental and deliberate Snowdens scattered across American businesses, large and small.

I personally believe that IT personnel should have episodic access to the accounting system; not at will. Perhaps you do not agree with this, fine.

But, you should take advantage of the new cyber security requirements adopted by the Department of Defense to think about the issue, to develop your own policies and procedures.

DARPA put up an excellent guide for small business with links to expanded materials. Take a look and think about it.

https://www.darpa.mil/work-with-us/for-small-businesses/cybersecurity

By, the way, if you were wondering what happened to the missing folder, an employee visiting from another location to document procedures, had moved the folder to her personal files for future reference thinking she had copied it. We discovered this a couple of hours later when she wandered in to the office.

More at www.dcaacompliance.com

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