Myths and Realities

As a small government contractor, you may think you can cut corners because you’re not being held to the standards of the “big guys.”  That type of thinking can cause you big problems. 

Here are common myths that can lead to financial missteps.   

Myth: I’m too small for my books to be audited by DCAA.

Reality: Regardless of size, ALL contractors will be audited by DCAA even before winning a contract. This is to ensure that you have the financial capabilities, and a system to accumulate direct and indirect cost information. Audits conducted prior to the contract award are referred to as a “Preaward survey.” Once the contract begins, the same audit will be done as a periodic check-in to ensure that you are staying compliant.   

Myth: Because I’m small, all of my G&A (general and administrative) costs are allowable.

Reality: The goal of government procurement is to be a good steward of taxpayer dollars by ensuring that contractors spend those dollars wisely. Therefore, even if an expenditure is allowable, the government will try to make sure those costs are “reasonable” – i.e. competitive, cost-conscious and fair.  

Here are some common examples: 

  • Airfare costs are allowable but first-class usually isn’t. Allowable airline cost is limited to lowest possible fare available to the contractor as stipulated by the FTR /JTR travel guidelines. Contractors can adopt the government regulation as a bench mark for reasonableness. 

  • Advertising is allowable but not for purposes of promoting your business. Advertising costs which are primarily to generate sales, stimulate customer interest or enhance the image of the company are not allowable unless the advertising is specifically to recruit candidates for a government contract.

  • Entertainment costs are prohibited. Any costs that have a social component are expressly forbidden regardless of their ability to increase productivity or stimulate interest in doing business with the contractor. 

  • Other examples of prohibited costs: 
    • Bad debts  
    • Alcoholic beverages  
    • Fines and penalties  
    • Federal Income taxes
    • Contributions and donations
    • Mergers & Acquisitions
    • Membership to social clubs
    • Lobbying and political activity 
    • For additional examples see: FAR Part 31.205-XX

Myth: It’s ok if my labor costs aren’t meticulously accounted to the right cost centers.

Reality: Timekeeping is an area where the government pays special attention because they can’t verify its accuracy other than questioning the employee. Even though electronic timekeeping systems have internal checks and balances, the government still uses a forensic lens to ensure that the recorded time is accurate and documented as per regulation.      

Myth: My exempt employees only need to record a 40-hour work week even if they work more.

Reality: The government wants to know how long a job actually takes to get done. So even if an employee is exempt, all their hours must be documented, including when associated overhead costs are calculated.      

Myth: I can set executive compensation at any level I see fit.

Reality: Your indirect rates are calculated based on what the government considers to be reasonable overhead costs. Executive compensation should be comparable to companies with similar employees, sales revenue and industry. Some of the guidelines the government uses to determine your indirect rates include:  

  • Substantial compensation plans for executives in small companies
  • Any bonus or incentive compensation plan 
  • Employee stock-option plans
  • Executive compensation where amount for the five most highly compensated individuals appears to exceed FAR statutory limits (For additional examples See FAR 31:205-6)