A contractor, and frequently, a subcontractor must submit a Standard Form (SF) 1408 with a proposal. The SF 1408 supports the potential customer’s conclusion that the contractor or subcontractor’s accounting system is in compliance with federal regulations. By understanding the objectives of each component, a future proposer can prepare for a positive and “happy” SF 1408.
Dissecting page two of the SF 1408, we begin with Generally Accepted Accounting Principles (GAAP). Most importantly, this means a General Ledger based on accrual basis – not cash basis – accounting. What’s the difference? The organization buys a $120,000 computer server, expected to last five years with a residual value of zero dollars (because five-year-old technology will have no market value). With cash basis accounting, the entire cash outlay is expensed when made. With accrual basis accounting, the computer server is recorded as a long-term (fixed/capital) asset, when cash is reduced. In our example, using straight-line (evenly expensed) depreciation, the $120,000 is expensed over time, while reducing the value of the asset. $120,000 divided by five years equals $24,000 per year; depreciation expense of $2,000 is recorded before each month-end closing of the General Ledger. GAAP requires implementation of several other tasks, disclosures, and internal controls to yield a fair representation of the financial picture.
The list under number two of the SF 1408 seeks a fair representation of costs on jobs funded by the U.S. Government. Direct costs belong in the Cost of Goods and Services Sold. These related to costs paid by the company for deliverable products and labor. Indirect costs are not significant components of deliverables, and are captured in accounts outside of the Cost of Goods and Services Sold. Next, the direct costs are recorded, and viewable, separately for each sales contract. Job cost accounting, sometimes called project accounting, facilitates customer invoicing; all direct costs on the invoice mirror the Cost of Goods and Services Sold for that job. One contract (or subcontract) number might require more than one job, especially if a modification (or change order) adds a follow-on phase or separate Scope of Work. Preproduction costs require a separate job. Each sales contract has at least one job; one job might be only part of one contract, especially if requiring separate invoices. As number four of the SF 1408 implies, recording costs by contract (or job) forms a helpful basis for estimating future jobs.
The “logical and consistent” allocation of indirect costs imposes the GAAP requirement that each indirect pool be allocated on a causal or beneficial basis. Distributing the employer-paid premiums for Workers’ Compensation via Direct Labor, because labor caused the need for Workers’ Compensation, makes sense. Distributing Workers’ Compensation via Subcontract dollars defies logic. If the indirect Shipping account includes postage and messenger-delivery services, all such expenses are recorded in the indirect Shipping account, regardless of applicable job. Indirect pools may be allocated to lower-tier indirect pools. The focus targets existence of a causal/beneficial relationship between each pool and the base for distribution plus the consistency of allocations – not on the complexity of structure (how many pools).
The General Ledger captures all costs; every amount on each customer invoice is easily traceable to the General Ledger. The frequently updated General Ledger (plus any outside calculations, such as reports from “add on” software or spreadsheets) forms the basis for customer invoices.
Timekeeping, especially for service providers, represents one of the most important (and most closely reviewed) aspects of the accounting system. Each employee’s timecard must be current (filled out daily), accurate (charging the job actually worked), and complete (showing all hours worked). The timecard does not just cue a paycheck. Primarily, the timecard triggers the distribution of labor costs among accounts and jobs in the General Ledger. Again, the essential purpose of the timecard is tracking where labor is invested. An employee, who typically charges direct, charges an indirect account for time spent at a company-wide staff meeting. Although exceptions might be supportable, preparatory (and DCAA) audit flags include:
- Employee’s timecards charged 100% direct to jobs
- Salaried employee’s timecards charged 100% at 40 hours per week without any overtime (whether or not that overtime is paid)
- Employee’s timecards consistently charged direct to a cost-reimbursable job that suddenly charged no time to that job, when reaching the ceiling for that labor category
Employee training facilitates current, accurate, and complete timecards. Help every employee understand when to charge an indirect objective/account, why to charge a particular job, and which hours to include.
The General Ledger segregates costs that are not allocable to jobs funded by the U.S. Government (e.g., phone directory advertising), unreasonable (e.g., above-market salary for the owner), or unallowable per Part 31.2 of the Federal Acquisition Regulations.
If required by the contract, individual line items and/or unit costs split into individual jobs. For example, an Indefinite Delivery Indefinite Quantity contract might show one line item for one pound of goose feathers and a separate line item for one pound of chicken feathers. The actual cost of a post-award Delivery Order for 60 units (pounds) of goose feathers can only be correctly determined, if the cost of goose feathers is distinguishable from the cost of chicken feathers. This impacts bids, proposals, and cost-reimbursement invoices.
Under number three of the SF 1408, the accounting system continually reports individual contract costs, for comparison with ceiling and withholding requirements. Financial reports afford comparisons for applicable FAR 52.216-16, 52.232-20, and/or 52.232-21 amounts.
Under number five of the SF 1408, see that the reviewer considers whether the accounting system encompasses all of the above. In preparation, document each gap and the detailed plan – with implementation dates – for bringing the accounting system into compliance. If a compliant accounting system is not fully operational, a contract might still be awarded – with a follow-up accounting system review anticipated.