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Keeping track of costs properly requires a robust government cost accounting system. A private-sector entity holding a federal cost-reimbursement contract is subject to government cost principles and might also be subject to federal cost accounting standards (CAS), which prescribe in great detail accounting methodologies.
A fully spun-up cost accounting system spans estimating, purchasing and earned value management and requires records retention, documentation and compliance with directions only expert accountants can stomach. Those standards are found in the FAR appendix, commonly referred to as FAR 99 because it reprints chapter 99 of Title 48 within the Code of Federal Regulations. Because federal cost accounting standards have no private-sector equivalent, most companies are rightly fearful of the expense and time it takes to set up a financial department capable of implementing them.
Accepting a cost-reimbursement contract does not automatically mean you must stand up a cost accounting system, however. For example, small businesses are exempt, even if they have a cost-reimbursement contract. Even large companies selling exclusively commercial items can skirt by without having to install and maintain a FAR 99 cost accounting system because commercial item pricing is based on a how a company sells commercially, not cost accounting.
Time-and-materials contracts also are level-of-effort contracts that share much in principle with cost-reimbursement contracts, but they have a few significant differences.
First, the hourly rate under time-and-materials includes company profit. This brings us to the second major difference between these contract types: because the labor-hour rate includes profit, the federal government doesn't separately incentivize good performance by tying profit to performance.
This means that contractors have the clearest motivation to bill for as many hours as possible, leading policymakers to perceive time-and-materials as the riskiest contract type. To mitigate that risk, time-and-materials contracts come equipped with a ceiling amount that vendors exceed at their own risk, although a contracting officer can increase the ceiling. Finally, the FAR doesn't exclude commercial items from procurement through time-and-materials contracts as it does with cost-reimbursement types.
To mitigate risk to the government, T&M contracts require reams and reams of documentation. Companies submit time cards and evidence that employees meet the labor category qualifications before a contracting officer will process payment. Time-and-materials contracts are also a favorite target for federal auditors, so companies with these contracts should be ready to justify every expense to a team of skeptical examiners who might show up one day to commandeer your conference room.
Federal contracting, as you've no doubt come to appreciate, can get complicated. Even contracting officers often are not fully aware of all of its complexities. So it's easy to slip into a variety of pitfalls. Working with people who understand the particulars is the best way to stay out of trouble.
This article was adapted and digested from the book "The Inside Guide to the Federal IT Market," published by Management Concepts Press. For more information, visit www.insideguidetofederalit.com. Steve Charles is a co-founder of immixGroup, which helps technology companies do business with government. He is a frequent speaker and lecturer on technology and the federal procurement process. He can be reached at Steve_Charles@immixGroup.com.