6 critical accounting challenges for government contractors

Government contractors always have faced accounting and financial management challenges. Simply put, the bar is higher than in the commercial market. Government agencies’ stringent, complex, and seemingly ever-changing accounting and contract regulatory requirements can be especially daunting for small and midsize businesses.

Today, when government is ratcheting up efforts to show it is safeguarding taxpayer dollars, contractors must demonstrate that their accounting practices and procedures comply with government requirements. Those that clearly do this well with systems, infrastructure, policy, and procedures and an ability to adapt to new requirements have a huge advantage over their competitors.

Here are six of the most common accounting and financial management mistakes companies make – and ways to avoid them.

• Not Understanding Government Rules/Requirements – Companies that think government accounting involves a slight variation from commercial business are wrong. Through voluminous and ever-changing requirements, such as Cost Accounting Standards, Federal Acquisition Regulations and FAR agency supplements, government contractors must comply with criteria above requirements promulgated by the Financial Accounting Standards Board. For example, the government restricts executive compensation to what it considers “reasonable." Compensation above this is considered “unallowable," meaning it cannot be charged against or recovered from a government contract. Another example: Entertainment charges, including alcoholic beverages, are unallowable.
• Building a System Around an Individual – As government contractors grow, they “systematize” the accounting function to improve compliance and may hire a mid- or senior-level accountant to institute a system. A question companies should ask, assuming it is financially possible, is how that system can be maintained if the key individual(s) leaves the business or is incapacitated.
• Failure to Keep Pace – Whether it is a new administration, increased government transparency driven by the stimulus plan or the normal run of new regulations, there will be more changes to government accounting and financial management requirements. Companies need to anticipate and implement systems, policies and procedures designed to support compliance with changing requirements.
• Lack of Trained Personnel – If data is wrong or entered into the system improperly, or internal accounting processes such as contract cost allocations are performed incorrectly, the system is jeopardized. Companies need to ensure they not only have skilled personnel but also have policies and procedures to avoid mistakes and correct them properly when discovered. Personnel unfamiliar with requirements and accounting processes common to government contract accounting often undermine a company’s investment in the accounting software itself.
• Waiting Too Long – Your company needs to operate on the assumption that it will face a rigorous government audit, possibly with little or no advance warning. You should be ready and confident that you will obtain a positive evaluation. Once a company is tagged with having a noncompliant accounting system, it is very time-consuming and difficult to regain the government’s acceptance. Indeed, contracts can be terminated, new business opportunities squandered and even payments on existing contracts withheld until improvements are made.
• Failing to Use Available Information – Implementing an accounting system, designing procedures and following policies to comply with government regulations will make more information available to the contractor, but it has little value if the contractor does not leverage it to manage and grow the company. An overhead rate, for example, must be calculated correctly to comply with government requirements, but if management does not learn why the rate is important and manage spending to control rate variances, it is of little use. With innovative technology, companies are far better able to comply with government contracting requirements and can use the systems to manage and grow their companies while gaining necessary compliance.

To capitalize on opportunities, government contractors should evaluate their internal operations and consider alternatives for improving their chances of survival and growth. Internal process changes, new software applications and outside expertise should all be examined to determine how they might strengthen a company’s posture toward compliance and, therefore, growth. Companies that take these steps do a better job of keeping contracts, obtaining new ones and operating more profitably.