Rose Report: Issue 10

Taking a Cue from Government Contractors

Government contractors deal with challenging accounting regulations meant to ensure they properly manage taxpayer money. Though other businesses might consider themselves lucky for avoiding this extra level of compliance and oversight, many could benefit by taking a cue from organizations that work with the government.

Here are three key lessons that companies can learn from government contractors:

1. Analyze and reconcile accounting records on a monthly basis.

Many contractors must answer to the Defense Contract Audit Agency (DCAA). Among its many requirements, the DCAA mandates that contractors calculate the indirect rates they charge the government by dividing their expenses into separate “rate pools”—categories that typically include general and administrative costs, overhead expenses, and fringe benefits. To ensure the budgeted indirect rates they gave the government at the beginning of the year remain in line with the actual costs of doing the work, contractors closely monitor these indirect cost pools on a monthly basis. At the end of each month, a compliant government contractor will reconcile its balance sheet and income statement accounts to make sure there are no material discrepancies between the actual indirect rates and the budgeted rates.

Other businesses would do well to follow suit. All commercial organizations have inherent rates, just as contractors do. Companies that take the time to calculate and monitor indirect rates, have a much better picture of their financial performance. This financial information allows companies to take immediate corrective action if needed and improves their ability to meet their financial objectives.

2. Maintain a well-documented accounting system with adequate internal controls.

Government contractors must have accounting systems that are DCAA-compliant, meaning when a government auditor shows up, a successful contractor will be able to demonstrate that it has carefully documented all transactions, as well as followed its own written policies and procedures. It’s also vital for contractors to have adequate internal controls built into their systems, to prevent them from making a material misstatement.

This lesson—that careful, fully documented accounting practices are vital to any organization—should be obvious, but not every commercial business maintains adequate documentation of its accounting policies and procedures. Key internal controls should be identified, maintained, and tested routinely. This is critical to ensuring that the financial information that management relies on is complete and accurate.

3. Look ahead.

Government contractors rely on forward pricing. This is the practice of incorporating the projected costs a company will incur after the addition of a significant new project into their pricing model. This method allows contractors to predict what their indirect rates will be once they win those new contracts. Often, winning additional business allows an organization to increase revenue to the point that it can lower their indirect rates, putting it at a competitive advantage when bidding on future work.

Many commercial businesses do not incorporate forward pricing into their models. Just as it does for government contractors, forward pricing could make many businesses more price-competitive by allowing them to look ahead, properly manage their pricing, and realize greater opportunities as they grow.