Building Salable Value in Your Federal Contracting Business

There are two ways to build value you can sell when you retire from your federal contracting business.  First, focus on building a reliable source of future cash flow.  You may have heard that contractors sell for some multiple of historical earnings, for instance five times cash flow.  This is entirely wrong.  Contractors sell for a multiple of future anticipated cash flow..

Imagine a contractor, who made $2 million dollars in profit in 2013.  That translates into a  business worth $10 million at a five times multiple.  That sounds pretty good.  However, what if that contractor’s sole contract ended in 2013 and there will be no guaranteed revenue in 2014.  How much would you pay then for that business?

Past performance only affects value to the extent it sheds light on future performance. You build salable value by creating credible future cash flow and building a system to continue that cash flow after you have left the business.  After all, if the revenue stops when you leave, you have nothing to sell.

Second, you build salable value by creating reliable operating and financial systems that don’t depend on you. Once again, if the work stops when you stop, you have nothing to sell.  Also, if the business doesn’t have reliable DCAA compliant financial systems, expect a buyer to discount the value of your company.  A deficient accounting system gives an unreliable picture of future cash flows and may result in contract back charges.  Those risks mean a lower price for you.

The common thread in the above ways to build business value is you – more specifically – eliminating you.  The less the business depends on you, the more valuable your business.

Thanks for reading!  If you have any questions, please contact me at fstitely@TotalAccountingCare.com.  We take care of your accounting, so you can take care of your business.  Please visit our web site at www.TotalAccountingCare.com to see how.  What would you do, if you had the time?

Common Errors in Timekeeping for DCAA Contracts – Part II

Part I covered the requirement for documenting timekeeping procedures in writing and documenting employee training in timekeeping procedures.  This time, let’s cover some timekeeping basics for employees.

First, employees must record their time on a daily basis and must do so personally.  For instance, supervisors are prohibited from recording time on an employee’s behalf.  Recording time in advance or after the fact is also forbidden.  Manual timekeeping is so 1900’s, but if you’re still doing it, timesheet entries must be in ink.

Second, corrections to timesheets must be made by the employee and approved by the immediate supervisor.  For manual systems, incorrect entries are crossed out in ink with the correct entries entries then made in ink and initialed by the employee and supervisor.

Third, all time must be recorded even if the time isn’t chargeable to a contract.  Time must be recorded to project codes or to non-chargeable categories such as overhead, vacation, or general and administrative.  The project codes must be established by company management and not changeable by employees.

Of course, there are many other timekeeping requirements for employees.  These are just the basics.  Total Accounting Care offers federal time keeping compliance as a core part of the service.  If you have any questions or for a review of your system, please contact Michelle Evans at mevans@TotalAccountingCare.com or (703) 818-8284.

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Common Errors in Timekeeping for DCAA Contracts – Part I

One of the key areas of a DCAA compliance audit is timekeeping.  Small government contractors typically fail compliance audits as a result of inadequate timekeeping procedures.  Most small government contractors lack sufficient documentation of timekeeping procedures.

For government contracts, DCAA and other federal contracting regulatory bodies require contractors to formally document timekeeping policies and procedures in a manual distributed to all employees.  Here are a few of the common policies required in the timekeeping procedures manual:

1. Time must be recorded daily, not in advance or after the fact.  For manual systems, time sheets  and time sheet corrections must be in ink.
2. Time must be recorded to contracts, where applicable, or indirect cost categories, when an employee is not working on a contract.
3. Employes must make their own corrections to time records, which must then be authorized by supervisors.
4. For electronic time keeping systems, employees should only have access to contract codes, where they are authorized to charge time.

This is just a brief list of some of the requirements.  There are more.  Also, contractors must document the delivery and availability of the procedures manual to employees.

Employees must also receive annual time keeping training.  The regulations require that the training can be either formal or informal, but we recommend documenting when each employee is trained in personnel files.

Total Accounting Care offers federal time keeping compliance as a core part of the service.  If you have any questions or for a review of your system, please contact Michelle Evans at mevans@TotalAccountingCare.com or (703) 818-8284.  Please visit our web site at www.TotalAccountingCare.com

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D.C.A.A. Compliance for Beginners

If you are a government contractor, you need to be aware of the Defense Contract Audit Agency (D.C.A.A.)  The D.C.A.A. approves your accounting system for the purposes of offering products and services to the federal government.  They may also audit the results coming from your accounting system for the purposes of determining compliance with Federal Acquisition Regulations (F.A.R.)

If you are new to the government contracting world, get used to acronyms.  Here is another one – D.O.D. (Department of Defense).  The D.C.A.A. has jurisdiction over the accounting for D.O.D. contracts, N.A.S.A. (yes, the space people), and some other agencies.  Making your accounting system D.C.A.A. compliant seems a daunting task, but here are first three steps toward making your accounting system compliant.

First,  your accounting system must segregate direct, indirect costs, and unallowable costs.  Direct costs are the actual costs of performing a contract such as contract labor, contract materials, and potentially travel related to a contract.  For example, if you provide  IT support to a federal agency, the labor costs of the people you have assigned to providing the services is contract labor and thus a direct cost.  The salary you pay to your bookkeeper is not a direct cost, since he / she is not providing services directly under the contract.

However, your bookkeeper’s salary is a perfect example of an indirect cost.  An indirect cost does not directly benefit a contract but supports the execution of a contract.  Telephone, office supplies, payroll taxes, employee benefits, and rent are typically considered indirect costs.

Unallowable costs are costs determined under F.A.R. to not be chargeable as either a direct or indirect cost.  Interest expense and income taxes are considered unallowable costs as well as alcoholic beverages.  No drunken fun allowed on the fed’s dime.

Key to segregating these three types of costs is setting up the chart of accounts in your accounting system properly.  You should group the accounts for your profit and loss statement by these types of costs.  For instance, accounts numbered 5000 through 5999 might be designated as direct costs.  Accounts 6000 – 8999 might be designated as indirect costs and accounts 9000 through 9999 could be used as unallowable costs.

Second, you must account for direct costs by contract.  For instance, if you have five contracts, you must be able to produce reports showing each type of direct cost by contract.  Accounting software typically helps you with this through job costing functionality.  Accounting for federal contractors has much in common with construction contractors in this regard.

Third, you must have a D.C.A.A. compliant time tracking system for labor.  The F.A.R. sets forth a host of timekeeping requirements, which are enforced by the D.C.A.A.  Most off the shelf accounting software packages, like the time tracking in QuickBooks, are not compliant by themselves.  Most require some sort of additional procedures, sometimes manual, to provide D.C.A.A. / F.A.R. compliance.  You can, however, find specialized D.C.A.A. compliant time tracking software that may integrate with your accounting software.

As you can see, understanding the basics of D.C.A.A. compliance for federal contractors isn’t difficult. Compliance requires up front planning when designing your accounting system.  Most small contractors can accomplish this planning in a day or less.  Ask your CPA for help if you don’t feel confident in this area.

Thanks for reading!  If you have any questions or need assistance setting up your accounting system, please contact Michelle Evans at mevans@TotalAccountingCare.com or (703) 818-8284.  Pleae also visit our web site at www.TotalAccountingCare.com