Accounting software keeps small business out of federal market

A shrinking number of companies seem to want to do business with the federal government. Especially small businesses. Could it be all of the reporting and compliance requirements. There is one class of compliance that is particularly tricky, as the Federal Drive with Tom Temin heard from the Founder and CEO of PROCAS, Jim Wesloh.

Interview Transcript: 

Tom Temin  For someone that went through the trouble of finding government opportunities, deciding they want to do this and then bidding and winning, what should they have in place already to be able to fulfill a contract that is unique and different from what is normally expected in the private sector?

Jim Wesloh Well, we focus on government contract accounting, including timekeeping expense reports, the entire general ledger and project management and project reports. And we’re going to focus particularly on timekeeping right now. A lot of new owners might be used to working in a commercial organization where they can just fill out their timesheets at the end of the week and turn them in, you might think that’s fine. There are some additional requirements for government contracting, for example, they’re going to want to make sure that everybody does their timesheet every day, you might say, why can’t I just wait to the end of the pay period? Well, just like you might hear on the news that people need to have contemporaneous recording of thoughts when things happen to justify them. It’s the same with timekeeping. If you wait two weeks, you might not remember what you did. And so that’s the only justification that you actually have for the work that you did.

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Tom Temin And just because the government says, so you have to do it every day.

Jim Wesloh Yes. So, the Federal Acquisition Regulations is the body of law that governs purchasing from the government. And it says that you need to make sure that you can justify your expenses. And then the defense contract audit agency will audit contracts, not only for defense contractors, but often for other agencies. Also, you must follow their rules.

Tom Temin Sure. And it’s safe to say to that the DCA could come at you six years later and look into a contract. Oops. So that gets to the idea of keeping time and keeping records for a long time, in a manner that you can reproduce them.

Jim Wesloh Yes. And the other thing is, some new government contractors might think well, can I just record time? Or do the accounting for my government programs, and not worry about commercial contracts if they had the commercial contracts before? And the answer is no, if you’re a government contractor, everything falls within the scope of the audits, because things that you do on the commercial contracts will also affect the government contracts, you have direct costs that are for a particular project. But you also have indirect costs that are allocated across contracts, both government and commercial. So you have to establish your base, which would be like the denominator of a fraction, to show how much needs to be going to the commercial contracts and the government contracts, you have to record time for all your contracts, and also your indirect expenses, your overhead and your general administrative expenses, as well as your paid time off and holiday, those also get allocated to your government contracts and your commercial contracts.

Tom Temin So, a standard commercial system for accounting of all of that then would not be adequate for government contract.

Jim Wesloh That’s right. In commercial contracting, you might hear of companies having overhead, that’s generally just all the costs that are going directly to the jobs in government contracting, they want to have you split out overhead that supports contracts in general administrative costs that are necessary to run the business but don’t really help your projects. And then they might also want you to break out fringe benefits in addition to base salary that would support your employees and potentially facilities costs. They want you to track and then bid proposal costs and independent research and development costs. And about a quarter of the government contractors may also have a value-added situation where they have a lot of subcontractors or materials. And they would want to record subcontract administration or material handling costs as separate indirect costs. So that’s a lot more elaborate. And you’d have to then be able to calculate your indirect rates and apply them to your job so much more complicated for commercial organization,

Tom Temin we’re speaking with Jim Wesloh, the founder and CEO of PROCAS. So that gets complicated as you say, for example, if you have administrative help, and it costs you a million dollars a year to maintain it for your company, then you have to allocate that portion of administrative costs to what it is you’re doing for the government. And that gets down to specific hours. And it’s almost like you have to guess or some point, I mean, is there allowable limits within all of these different elements that you have to allocate toward your federal contract, such that there’s some matchup between what you actually spent and what went towards supporting that particular effort.

Jim Wesloh So, you’ll record the cost for the projects, and you’ll record for example, your administrative costs, and if you have a cost-plus fixed fee contract, in theory, you get reimbursed for all of your costs, but in practical purposes, there might be a cap on your contract value. And so if you said you were going to spend $2 million on direct costs and a half million dollars on indirect costs and you had in this is a very simplified version of an indirect rate, you have a 50% indirect rate, but then you spent 750,000, that was above the contract value, you wouldn’t be able to be reimbursed for the additional costs.

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Tom Temin Right? So, you have to have proportionality in what it is you’re allocating from your overall costs to your federal contract costs.

Jim Wesloh Yes. So, in very simplified terms, if a quarter of your projects were government and a quarter of the projects and costs work commercial, then you’d have 25% Going to the government 75% Going into commercial that’s a very simplified version of this, it gets much more complicated than that.

Tom Temin Sure. And suppose you have like a really expensive administrative assistant, that is maybe paid more than the people that you have working on the contract for the government, is that likely to cause a problem, your hourly administrative costs that you’re allocating to this are higher than your direct cost of the person doing the work the programming,

Jim Wesloh they want to look for reasonableness. And if you have a situation where you’re paying an administrative assistant, much more than the people working the jobs, it’s probably a situation where it’s a family or friend. And they’re probably gonna say, though, that that’s not allowable cost that it’s, the position doesn’t justify that. So, it’s not reasonable to be paying that much,

Tom Temin right. If you’re paying say, you want to have eight a status, or women own status, and so you make your wife, the sensible person, that wife can’t also be the administrative assistant, taking a half a million dollars out of the business and salary, that kind of thing.

Jim Wesloh Yeah, that would be unreasonable and unacceptable. So, getting back to somebody who’s thinking about getting into government contracting particular, that some of the emphasis that they should be thinking about for timekeeping, people have to record their time every day. If it’s a digital system, they have to be a unique user login times other people can’t get in and do your time for you. If you make a change, there has to be an audit trail of the changes with a reason for the change. And at the end of the period, they have to certify it. And then a supervisor has to approve it. So, these are just some basic elements that you must have. And if you don’t have a system that can handle that, then the defense contract audit agency or some other auditor might come in and say that these costs are not justified, they’re not allowable, we have no confidence in them. So, the government may not reimburse you for them. So, you might not get paid on your contracts.

Tom Temin Right. And the government, by the way, don’t they also have the right to certify or approve of the accounting system that you use before you use it on a contract?

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Jim Wesloh Yes, there’s a standard form 1408. That’s basically a checklist of things that you need an accounting system to do. And some of those things are inadequate timekeeping system accurate accounting system, the accounting system has to generally follow generally accepted accounting principles, including doing accrual accounting, and not cash accounting that most companies will start out doing and is okay for tax purposes, but they want to have accrual accounting. And they want to make sure that time is recorded every day. And you know that they can allocate the time to the different cost objectives that we talked about the direct the overhead, the GNA, the fringe facilities, material handling, subcontractor, administration, BNP and R&D they will check in make sure you have an inadequate accounting system.

Tom Temin So, you have to have that in place before you really bid if you’re going to be able to have any success.

Jim Wesloh They’ll come in and often do a pre award audit of your accounting system, and they want to make sure that you have something in place ready to go. If you’re not operating it already. If your commercial company not operating it, they want to make sure you actually do have it set up to be ready to go if you win the contract.

Tom Temin Well, two quick questions. Does the cost of adding that system capability? Does that qualify as a reimbursable cost?

Jim Wesloh Yeah, that is an allowable cost. So, your GNA rate so you can find a system and implemented, and those costs would be allowable, according to the Federal Acquisition Regulations.

Tom Temin And I don’t know much about the accounting software market, but do the large or the popular commercial programs have federal extensions available to them in general?

Jim Wesloh a couple of them do. But generally, they’re rather awkward to get the data to go back and forth, because you’d have to have all your costs in the general ledger. And then you would have to have a way to do these indirect rates with all these different cost pools. And then you have to come up with the rates for those different pools, and then you need to be able to allocate those costs back to all the contracts. And so that gets complicated when that’s in two different systems. So, it’s much easier if you have a system that’s purpose built for government contracting.

Tom Temin And I guess those programs then can work backwards toward purely commercial customers too?

Jim Wesloh Yes, there’s nothing in government contracting that would preclude someone from using the government contracting system for commercial work, but the commercial systems are not adequate for doing good Government Contracting generally.

Tom Temin Right. So, if you start a company and you think you might someday want to do government contracting, maybe prove yourself with commercial First, start out government compliant. That really would be cruel accounting.

Jim Wesloh We sell accounting system for government contractors, we would not recommend doing that if you’re going to do commercial work, we would recommend that you do it and you do it as easy as possible. And then if you are getting serious about it, it’s a big commitment. So, we actually would not recommend that somebody just start a company using a government contracting system with the thought of maybe in five or 10 years, I might do government contracting. I don’t want to go against our own sales, but we would not recommend that.

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