Why Is Government Contract Accounting Easier Than It Sounds?
SpaceX won its first NASA contract in 2008. Many wondered how a private company could manage the complicated web of government contracts, especially when it comes to finance and accounting.
Government contracts are notorious for their complexities. They aren’t your regular business deals, as they come with strict compliance and regulations. So, SpaceX pulled off the deal beyond expectations.
Are you wondering what they did?
Their success wasn’t just about rocket science; it was about government contract accounting.
If you are a business that wants to land a government contract, having the right accounting system can make or break a deal. The good thing is that it’s not rocket science and can be done more easily than it sounds.
What is Government Contract Accounting?
Let’s start with the basics. Government contract accounting involves tracking, managing, and reporting the finances of companies that work with government agencies.
There’s accounting, and then there’s government contract accounting. The key difference is government contracts follow strict regulations and compliance.
In nerdy terms, government contracts require adherence to Government Cost Accounting Standards (CAS). The US government developed these principles to ensure contractors provide accurate financial costs. In Canada, a Government of Accounting Handbook outlines the accounting principles for government contractors.
These compliances can be tricky, but they are essential. It’s natural, as the government is your client, so financial accuracy and transparency are at the heart of everything.
Lockheed Martin is the largest government defense contractor in the US. It must regularly submit disclosure statements that clearly outline cost accounting practices. These statements should provide details on how costs are managed so there isn’t any difference between projected and actual costs incurred.
In addition to strict compliance, government contracts involve contact reviews and audits. A good example is the recent Boeing contract with the US Defense Department. Boeing had to undergo reviews as the company was under fire from the public and Congress.
All these examples may have made you think, “Tangent, government contract accounting seems difficult; how’s this easy?”
Good question!
The answer lies in the accounting services for government contractors.
Accounting Services for Government Contractors
In the previous section, we discussed the need to follow strict regulations and audits to land a government contract. To ease this process, you need services to ensure you land a contract. These services are not just plain accounting services; they are designed to manage the accounting challenges of government contracts.
For example, you are running a tech startup and have landed a government contract. If you remain stuck in these strict regulations, you may not focus on providing what matters the most: tech products/services.
Here’s how you can benefit from accounting services:
1. Setting Up an Accounting System
When you land a contract, the first step is to set up an accounting system. The system follows accounting principles that meet federal requirements. It tracks direct/indirect costs like project costs, allocates overhead expenses, and ensures proper billing.
For instance, the DCAA requires an accounting system that follows generally accepted accounting principles (GAAP) if you want to work with the US Defense Department.
2. Cost Allocation
The good ol’ costs are at the forefront of everything. Proper cost allocation is essential when working with government agencies; otherwise, you can face legal implications.
But let’s not go there!
Cost allocation is about segregating direct and indirect costs. By keeping track of costs, you ensure that you aren’t overcharging or undercharging the government. Contractors need to submit detailed cost proposals to justify the overall costs. This is especially true for cost-reimbursable contracts.
When you work with cost-reimbursable contracts, you need certified cost submissions. The reason is many government contracts are fixed-price. It means that the price your company quoted is the final price. However, it is nearly impossible to predict how much a service or a product would cost over the entire government contract period.
So, government agencies usually agree to cost-reimbursable contracts. So, there’s flexibility regarding the final price. Now, you don’t have to do all these complex things alone. Luckily, a fractional CFO can guide you through the whole process.
You can check our complete guide on how a fractional CFO can help your business.
3. Government Cost Accounting Standards
We already discussed CAS, but if we have to go into detail, larger contracts require compliance with CAS. It ensures contractors follow defined rules for cost estimation, accumulation, and overall financial reporting.
Hiring a pro service ensures that your business complies with all the defined principles that meet federal expectations.
4. Audit Preparation
We know from a Boeing example that audits are a big part of government contracts. Government contracts closely analyze the company’s cost records. They make sure that all the costs are recorded properly. If not, you can experience the same fate as Boeing.
Accounting services help businesses prepare audits by preparing accurate financial statements. Financial statements reflect a business’s financial performance. According to GAAP (Generally Accepted Accounting Principles), there are three types of financial statements: income statement, balance sheet, and cash flow statement. You can learn more about financial statement preparation here.
5. Financial Reporting
Financial reporting is the backbone of government contract accounting. As a business, you need to provide clear reports on revenues, expenses, and costs throughout the contract’s life.
Government agencies often require quarterly or annual reports; you can lose the contract if you miss the deadline or submit a wrong report. For example, Northrop Grumman is a major player in defense contracting. They rely on specialized contract accounting services to ensure no complications in compliance and financial reporting arise.
6. Advisory
Accounting services aren’t just about numbers. They provide valuable advisory services that can help you refine the overall financial process. For instance, they can help you set up a better cost-tracking system, improve invoicing, and advise on the latest government regulations.
Looking at the abovementioned services, you may wonder, “Gosh, Tangent, these are solid services. How am I going to provide all these services to the government?”
The good thing is you don’t need to go to the bottom of the Pacific to find a service provider that can offer all these services. Tangent Consulting offers CFO services for all government contracts without a hiccup. We deliver stress-free services so you can laser focus on your business instead of paperwork.
Final Thoughts
Government contract accounting can seem intimidating at first, and that’s completely understandable because of its strict regulations, audits, and compliance. However, by working with professionals, managing government contracts becomes straightforward.
You don’t need to go through this maze alone. Tangent Consulting can guide you through the whole process. Whatever financial challenge in government contracts comes your way, Tangent Consulting is just a call away 😉
FAQs
What is governmental accounting?
Governmental accounting manages all aspects of government finances, including budget preparation, funds allocation, and financial statement preparation.
What is contract accounting?
Contract accounting involves managing the financial aspects of the company within the requirements specified within the contract.
What is the difference between CAS and GAAP?
CAS is about accounting principles of government contracts, while GAAP focuses on accounting principles used by US companies.
