By Bernard Mustafa, PVBS Chief Executive Officer
By using a compliant enterprise ERP solution designed to handle corporate and government contracting business, the efficiencies and possibilities are endless.
When large commercial entities have significant Federal Government business operations, it seems like the tail is always wagging the dog. The government contracting division always has tougher accounting challenges to face than the commercial side because of DCAA, DCMA, FAR, and CAS requirements. Historically, this has forced the corporation to purchase and support multiple costly and disparate accounting systems across the enterprise. Unfortunately, these systems are usually not integrated and often do not speak to one another, which can lead to inefficiencies. Time and time again, these disconnects lead to undue pressures for everyone on the IT, finance and accounting teams.
The issue is not whether the corporate or government contracting divisional accounting teams should be responsible for government contracting compliance. Usually we’ve seen the executives at the government contracting division deal with the Government. They want to maintain the customer relationship and typically have the deep understanding of what the customer requires to ensure the business continues smoothly. Although we’ve seen cases where the compliance team resides at corporate, in many cases they do not have the long-term relationship with the government auditors or have an understanding of the nuances in government contract accounting needed to be successful. Either way, the corporation will have to figure out the best way to make it work for them.
The issue I want to address is how having different ERP systems makes matters difficult. Large companies have been forced to do business this way for decades…until now. With the new government contracting functionality available for Microsoft Dynamics AX, corporations now have the flexibility to give the government contracting division the same state-of-the-art functionality across the enterprise while serving their specific needs. Shared services such as Accounts Payable and Human Resources can be managed from a central location but the government contracting division (and other vertical business units for that matter) can easily receive cost allocations. And it does not matter if they centralize compliance at the home office or manage at the division.
CAS 403 – Allocations of Home Office Expenses to Segments
Let’s talk about specifically about how home office allocations are covered in CAS (Cost Accounting Standards) 403 – Allocation of Home Office Expenses to Segments. The DCAA Contract Audit Manual addresses how expenses incurred by the specific segments are to be allocated. According to the guide, “The basic concept of the standard recognizes that some home office expenses incurred for specific segments can be assigned directly. Other expense, not incurred for specific segments, have a clear relationship (i.e., measurable with reasonable objectivity) to two or more segments. Lastly, the standard recognizes a third type of home office expense (i.e., residual) which possesses no readily measurable relationship to segments.”
There are three types of home office expenses:
- Expenses incurred for specific segments. Example could be the labor from a Project Manager employed by the Home Office who exclusively oversees the work performed at a specific segment. As much as possible, these costs should be allocated directly to the segments that the costs were incurred for.
- Expenses that have a clear relationship to two or more segments. Example would be HR services performed at the home office level. These costs are to be grouped in homogeneous pools and allocated based on a causal relationship. For example, allocating HR costs by Payroll Dollars per segment.
- Residual expenses with no readily measurable relationship to the segments. These are whatever is left over after the other costs are allocated. The goal is to make this as small as possible.
We’ve seen that in many cases, the home office usually just doesn’t understand the requirements of the government contracting division. This invariably leads to inefficiencies such as adding days to the accounting close, additional staff needed, and a symphony of errors. The commercial enterprise may just not truly understand how significant the accounting requirements are for the government contracting operations.
Having one ERP system in place where you could maintain a charts of accounts at the divisional level, but be able to map those accounts at the corporate level, would be a substantial benefit. This flexibility makes it easy to set up cost pools which are allocated among the business units. Now that there is an enterprise ERP solution that is designed to handle corporate and government business, the efficiencies and possibilities are endless.