Creating a Chart of Accounts for a Federal Contractor

At a glance

• The Main Takeaway: the standard chart of accounts (CoA) that comes with your accounting software may not be designed with your federal contracting business in mind. We’ve laid out some basic changes that can help you optimize your chart.
• The Impact on your Business: by creating a custom chart of accounts you can run more in-depth and efficient monthly reports, make more informed budget decisions and ensure compliance with Federal Acquisition Regulations.
• Next Steps:  Aprio’s government contract experts can help ensure that you are getting the most out of your CoA. Give us a call for a consultation!

The Full Story:

Design your chart of accounts to reflect your business model

Don’t settle for the standard chart of accounts that comes with your accounting software. Instead, create a custom accounts list that enables easy visibility into your operations and sets you up for compliance with Federal Acquisition Regulations (FAR).

For a federal contractor, a balance sheet follows the same standard account structure as that of a commercial entity. Assets and Liabilities are divided into short-term and long-term. Short-term items, such as customer receivables, are generally resolved within one year, while long-term items, such as fixed assets and loans, tend to be multi-year. Assets consist of cash, receivables, prepaid items, investments and fixed or leased assets. Liabilities include accounts payable, credit cards, accrued payroll-related expenses, lines of credit and notes. The equity section should reflect your business structure as an LLC uses slightly different terminology (Contribution/Distribution) than a C corporation (Stock/Dividends).

Income statements for federal contractors about time and materials or cost-reimbursable contracts can differ greatly. To meet FAR requirements, you must separate your direct and indirect expenses. Direct expenses represent the cost of labor and materials for a specific project or contract. Indirect expenses encompass all other costs necessary to run the business. Once categorized, these expenses are further refined into similar groupings (often called pools). A common approach is to divide indirect expenses into four broad categories: Fringe, Overhead, General & Administrative (G&A) and Unallowable.

Fringe expenses encompass the cost to support a workforce, such as paid leave, employee benefits and employer taxes. Overhead expenses are costs to support contracts, including project management labor, recruitment, a portion of your facility cost or other contract support needs. General and Administrative (G&A) costs are the residual business expenses. G&A includes management labor, business development, IR&D, legal, accounting, and a portion of facility and office expenses. It is strongly advised to separately identify unallowable costs to ensure they are not included in your price calculations. In addition to FAR compliance, this approach allows you to calculate and monitor your indirect rates efficiently and enables easier forward pricing.

Best Practices:

Create labor accounts in all areas. As a federal contractor, you must record labor costs to the appropriate activity. Each section of your income statement should have its labor account. Employees then record hours for each of these labor activities on their timesheets.

Identify where you need more detail. Before you begin your design, evaluate where you have large spending areas or activity concentrations. For instance, if travel costs are significant, you may wish to add some granularity to capture the various components. Perhaps consider adding subcategories for airfare or per diem. This may help you identify areas of potential savings. Be aware that you may need multiple accounts for the same items. Travel occurs in support of direct customer projects and in overhead and G&A, each requiring a separate account.

Another common area of spending is professional fees, which may combine disparate items such as legal, accounting, business development and recruiting. These costs can be significant but serve different purposes. For instance, professional fees for business development can be quite substantial, and monitoring the spending level may indicate when it is time to invest in an internal resource.

Don’t create a monster! Conversely, don’t use your financial statements for minute detail. Collapse like items of small dollars into a single account. You may combine items such as postage, office supplies, printing and similar costs into one account called Office Expenses.

Budget by account. Create your budget to mirror your income statement structure and line up with your projections.

Use Numbers. Many software systems merely print accounts in alphabetical order. Simply adding a leading number to the account description allows you to easily create logical account groupings and roll-up sections and sub-accounts. As an example, your fringe benefits section might look as below:

            4000     Fringe Benefits (This is the summary level account)

            4001     Paid Time Off

            4002        Medical Benefits

            4002.1     Health Insurance

            4002.2     Vision Insurance

            4002.3     Dental Insurance.

            4003        Employer Taxes

An easy overhaul of your chart of accounts can make a difference in your monthly reports and your ability to manage your business. Call Aprio now for a consultation.

Related Resources

Unique Considerations for Joint Venture Multiple Award Schedule Contracts

Top Five Failures in GSA Office of Inspector General (OIG) Audits #1, The Price Reductions Clause

Taking Credit Where Its Due: The Importance of Contracts for Claiming the R&D Credit