A cost plus type contract is one where actual costs are billed to the government. It's similar to when you submit an expense report to your employer. You list your actual expenses, and expect to be reimbursed. However, a cost plus bill is a bit more complicated. You'll need to bill your direct costs, your indirect rates, and a fee. You may need to hold back a portion of the fee. And you'll need to report on your cumulative expenditures and compare what you have billed in total to what has been funded on your contract.
This article will discuss Direct Costs. I'll address other elements of a cost plus bill in future articles.
This concept seems simple enough. You bill the amount that you spent on an item. But there are a few tricks to this seemingly simple task.
First, you can only bill direct costs related to your contract. Sounds easy? Recall that a direct cost is a cost that can be identified to a single contract, the contract you are billing. It may seem obvious, but you cannot bill direct costs incurred on one contract onto the bill for another contract. But I see it all the time. Errors in posting direct costs to the wrong contract is a common occurrence. Review your invoice detail carefully.
Second, you must bill the actual cost, not an estimate. Actual costs mean the cost that you paid for an item. It's not "close enough" to guess at the cost, even if your guess is reasonable. The actual cost must be substantiated by a receipt or vendor invoice.
Third, you can only bill a direct cost if it is one that is allowed to be billed on the contract. You many have incurred costs on the contract that are non-billable. Non-billable direct costs result in a contract loss because they cannot be billed out.
Types of Non-billable Direct Costs
What kind of direct costs could be non-billable? An item that you did not propose as a cost when you submitted your bid would be one example. For instance, you forgot to include supplies in your bid and only included labor, but then realized later that you need to purchase supplies for the contract. Since your supplies purchase was not proposed, it is non-billable. When bidding a cost plus contract, take time to ensure that you have included all of your costs on the bid.
Or, your contract may specifically call out items that cannot be billed; travel is a common example. In this example, even if you know you need to travel on the contract, your government customer has excluded this cost from your contract, in writing. This type of non-billable direct cost will also result in a contract loss.
FAR 31 lists many types of unallowable costs; entertainment, alcohol, interest expense, etc. These unallowable costs cannot be billed directly to a contract, or for that matter, indirectly through your indirect rate pools. Keep FAR 31 handy while coding your accounting and creating your invoices. Here's a link to the regulations: http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfars/far/31.htm
Cost in Excess of Per Diem
The Joint and Federal Travel Regulations allow reimbursement for travel costs, either directly or indirectly through your indirect pools, for only the costs that do not exceed a per diem threshold. This relates to lodging as well as meals and incidentals. The amount that exceeds the per diem limitations should be expensed to an Unallowable account and cannot be billed to the government. Here's a link to the GSA site with per diem rates: http://www.gsa.gov/portal/content/104877
Billing labor cost for a salaried employee requires that the salaried amount is allocated among all the projects worked during the pay period, as well as the paid leave taken. This allocation is based on the number of hours recorded on the time card for the pay period. I recommend this method of allocation, known as total time accounting, which avoids uncompensated overtime issues if your employees record all of their time, even if it exceeds 40 hours per week. You should reconcile your allocation (known as a labor distribution) to your payroll register.
You can only bill for direct costs that were incurred during the billing period. For instance, if you are billing for the month of January, only costs that are posted to your accounting system during the month of January can be billed. This means that you will need to record all of your direct costs before you create your Cost Plus invoice. You also cannot bill future costs. What if you forget to bill a cost that is posted in your accounting system prior to your current billing period? Government customers have different procedures for billing prior period costs, so it is best to contact your customer before submitting your invoice.
Payment within 30 days
The general rule is to bill only for costs that have been paid for, or will be paid within 30 days after you receive payment from the government. Some contracts require billing only after you have made payment.
Estimates and Service Centers
It is possible to bill an estimated amount through the use of an internal service center using a standard rate. An example would be the use of an internal photocopy and printing service run by your company that charges a fixed rate per copy. Typically the rates will be approved by your customer in advance, and a true up to actual costs at year end is normally required.
Often you will be asked to submit copies of receipts and vendor invoices along with your invoice. If you fail to keep this documentation, your reimbursement is likely to be excluded.
The non-billable direct costs that are excluded from your bill, and unallowable expenses cannot be charged to your overhead pool. If you do this, the cost would be recovered through your indirect rates and in essence you would be billing the government for these items. Severe financial penalties exist if discovered during an audit and can result in contract termination and even disbarment from government contract.