Government contracting can be a very rewarding business—but if you don’t apply the proper principles in your approach the consequences could be costly.
At one point in time, we were approached by a company who needed our help with a government contracting invoicing issue. I’ll explain what happened throughout this post, but it ended up costing the company over $200,000!
Yep, that’s a pretty sizable amount of money that you don’t want to misplace or miscalculate—but don’t worry. When you understand some basic principles in the life a government contracting project, you’ll be able to avoid this potential pitfall from ever happening to you.
Understanding the 3 B’s of government contracting
So, let’s start by outlining these basic principles—what is referred to as the 3 B’s—involved in the lifecycle of a government contract. They are:
- Bid: The proposal you submit for the project
- Book: The accounting system set up that keeps track of costs throughout the project
- Bill: The invoice sent for the project (per the invoicing schedule established in the signed contract)
You must make sure these principles are working in harmony with one another throughout the span of the project. Each one affects the other and any mishap along the way can disrupt current or future projects.
For example, the type of indirect cost rates you have on your bid must be supported by the way your accounting system books your costs—both of which will ultimately be reflected in your bill.
Here’s what went wrong with the company who needed to pay over $200,000 back to the government:
Bid: On a cost plus fixed fee project, the proposal team prepared and sent in a proposal bidding the following indirect cost rates: fringe, overhead, subcontractor handling and general and administrative (G&A).
Book: The company’s accounting system was set up to capture costs in fringe, overhead and G&A, but not in subcontractor handling (there was no subcontractor handling rate established in the accounting system).
Bill: Because the accounting system was booking costs not consistent with the manner in which they were bid, the bill sent to the government was over $200,000 more than it should have been by the end of the project.
This particular company was preparing the bill manually (outside of the accounting system), which is whole other can of worms (and blog post to look forward to!). Because the bill was prepared manually, they were able to apply all the rates that they bid in the proposal even though they were not booking the costs in conjunction with the bid. The realization came when the final project invoice was prepared and they could not reconcile what they billed to the financials of the project generated through the accounting system.
Not only did this company owe back a substantial amount of money, they also had to explain to their client why they were non-compliant in their systems on a cost-plus fixed fee project. This could potentially cause future problems in winning proposals.
How to make sure bidding, booking, and billing are in alignment
To avoid this mess, the accounting system must reflect the bid being submitted to the government in one of two ways:
1. Current accounting system cost structure matches the bid being submitted
2. Accounting system will be appropriately modified to reflect the cost structure in the bid if and when the bid is won
If the bid, book, and bill parts of the process are not working together in harmony, you could find yourself up a creek!
The best way to harmonize the 3 B’s is to make sure your proposal, operations, and accounting teams are all working together on the pricing for the proposal. Having these teams meet and pass information back and forth will prevent something like the above scenario from happening to you.
We love working with companies to make sure they have the right accounting systems in place. Contact us at any time if you have questions or concerns on your accounting system. We look forward to hearing from you!