“What are best practices for a design firm that is involved or getting involved in government contracting?”
The one word that comes to mind is commitment.
In our experience, there are two kinds of design firms that contract with the government.
- The firm does some government work. They obtain an audited overhead rate, usually because they have reached a state-mandated threshold and want to meet the minimum standard.
- The firm is committed to maximize their profits related to Government contracting and thus, allocate time and resources to achieve this.
While you might envision only large firms as the second type, this is not necessarily so. A large firm or a very small firm can be committed to the opportunities in Government contracts. They research the rules. As needed, they make adjustments to their processes and procedures. Because of this commitment, firms experience much higher profitability on their government contracts, a result which many firms think is near impossible.
Know the Rules So You Can Play the Game
Design firms have come to Deemer Dana & Froehle, CPAs, ready to pursue Government contracts. They wanted an audited FAR overhead rate or an audited schedule of indirect costs. Working with the client, we determine allowable and unallowable expenses over the past year. From this an overhead rate is produced.
While this rate is acceptable, it is painfully far from optimal. Firms that get the most out of their overhead rate do two things.
- They have or put in place an accounting system that immediately identifies an expense when incurred as allowable or unallowable for FAR purposes.
- When faced with any business decision, they consciously consider, “How will this affect my overhead rate and, in turn, my bottom line?”
In firms that thrive in Government work, you see an analysis of almost every cost — overhead expense or not — so as to obtain the highest benefit. Policies and procedures are enforced with an emphasis on overhead maximization. For example, General Marketing is not an allowable cost but Selling Expense is allowable. A proactive firm utilizes multiple labor codes for the marketing function. Their detailed policy includes definitions for these marketing labor codes.
Another scenario is a firm with a mix of Government and private contracts that wants to maximize their revenue while managing their overhead. Their fleet of vehicles are typically charged to jobs and billed as a reimbursable. While most firms use the federal rate to charge the cost to jobs, this committed firm performed a detailed analysis of their actual vehicle costs. They discovered the actual cost was 70 cents per mile. This rate is charged to their jobs and included in their contracts. This often overlooked cost lowered their overhead rate but increased their bottom line.
Times Are Changing
The rules for the industry have changed. Many firms in the past hired a CPA firm or consultant to establish their overhead rate. They depended on them to classify their costs. This is no longer allowable.
With the passing of the new AASHTO Audit & Accounting Guide, a Government contractor must now take responsibility for their own overhead rate. They must have the knowledge in-house to make the appropriate allowability determinations. In addition, small firms can no longer employ very simple accounting systems. Under the new guide, all government contractors, regardless of size, must have a compliant job cost system under general ledger control. The new guide also stresses the need to account for costs correctly and maintain accurate financial information under Generally Accepted Accounting Principles (GAAP). This means the days of generating an overhead rate based on tax information and estimating unallowable expenses are over.
While the new regulations might push several firms out of their comfort zone, it is not all bad. The requirements are good business practices, which successful firms in the industry have followed all along. In the long run, many firms will look back and, while the process may have been painful, they will realize that their overhead rate has risen. In turn, now they are making profit on their Government contracts.
Design firms achieve strong profits by paying attention to the overhead rate and making smart business decisions based on how the rate would change. With an enhanced internal information system, firms can make proactive business and contract decisions, helping to solidify their industry position now and in the years to come.
Editor’s Note: For BillQuick Customers, Deemer Dana & Froehle confirmed that BillQuick handles FAR and related requirements, and augments QuickBooks and Peachtree Accounting to produce an effective internal information system.