Step 7: Invoicing and Booked vs. Billed
MEETS THE FOLLOWING DCAA REQUIREMENTS
- Proper segregation of direct costs from indirect costs
- Accounting system in accordance with GAAP
- Exclusion from costs not allowable under FAR 31
- Identification of costs by contract line item and by units
We examine invoicing using items in Quickbooks. Proper dating of customer invoices and expense in Quickbooks is presented. We discuss differences between direct costs and indirect costs and proper accounting treatment. A sample report, Booked vs. Billed, created in Quickbooks, is presented and its use along with our Booked vs. Billed excel template is demonstrated. The proper technique to enter a Cost Plus invoice into Quickbooks is shown. We review FAR 31 unallowables and the penalties associated with improper accounting and billing.
Using Items in Quickbooks
The use of Items in Quickbooks is the least understood aspect of the software, and consequently, its use is either ignored or is not properly implemented. However, the proper use of Items in Quickbooks will allow you to create powerful reports and eliminate almost all manual reconciliations of your billings to your costs.
If you have created an invoice in Quickbooks, you are familiar with Items, because you are forced to select one when creating an invoice. Many companies will create a very simple, generic item, such as "Consulting", to be placed on the invoice, and then wonder why they are required to do so. To many, this seems like an unnecessary step, since they can easily include the text "Consulting" in the description field on the invoice. So, why do you need to use Items for DCAA compliance?
The screen shot above shows the Item List in Quickbooks for a CPFF contract.
The reason you will want to use Items for DCAA compliance is that Items can also be used to track costs by Item. Tracking of costs, using Items, is rarely used by companies, but it should be if you want to eliminate tedious and time-consuming reconciliations of your billings to your costs, which is required for DCAA compliance. By using Items, you will be able to compare what you "billed", by Item, to what you have "booked" (recorded as costs), by Item. Known as the Booked vs. Billed analysis, you will be able to identify if you over-billed or under-billed your government customer.
Proper dating of customer invoices and expenses
Known as the "matching principle", you'll need to record your customer invoices in the period that the revenue was earned, and then "match" any expenses that directly relate to the invoice, by dating the expenses to the same period that the invoice is dated. This is important because your billings to the federal government, for T&M and CPFF type invoices, will need to be supported by actual costs booked in your accounting system and those expenses need to be booked to the same billing period that is covered by the customer invoice.
The most typical billing period in government contracting is monthly, starting on the first of the month and ending on the last day of the month. So, if your billing cycle is monthly, and the revenue is earned by people working in the month of June, for instance, then your labor costs, and any associated travel or ODC costs that were billed for June, would need to be booked to the June period in your accounting system.
Direct costs vs. Indirect Costs
Depending on the type of contract you are invoicing, you may need to include direct costs and indirect costs on your customer invoices. A direct cost is an expense that you incurred while performing the contract; one that can be identified to a single contract. An indirect cost is an expense that is shared between two or more contracts. Whether you can bill for direct costs or indirect costs depend on the type of contract.
For fixed-price contracts, you will bill a fixed priced, regardless of the costs that you incur. On occasion, you may have a line item on your contract that allows you to bill additional expenses above and beyond the fixed price you agreed to, in which case you will typically bill the direct cost; the expenses that you can identify only to the contract you are billing.
For T&M contracts, you will bill a fixed hourly rate for each hour worked, and then direct costs for non-labor expenses, such as travel or ODCs. Occasionally you will be allowed to bill indirect costs associated with the direct costs, as a markup.
For CPFF contracts, you will bill your direct costs and the associated indirect costs, plus a fixed fee. The indirect costs are billed as a percentage of your direct costs based on negotiations with your customer.
Booked vs. Billed Report
The Booked vs. Billed report is a custom report in Quickbooks that allows you to compare what you billed to customers to the costs recorded in Quickbooks. This report can be run for any time period. You will run this report for every customer invoice that you create by setting the time period to the billing period for the invoice. For instance, if the billing period of the customer invoice is the month of June, you would set the report date range to June 1 to June 30. This report is created by starting with the Quickbooks report called Item Profitability and then customizing the report to show only ordinary income and cost of goods sold, to filter out accounts that are not relevant. It is also helpful to filter the report for a single project. Run this report for each invoice that you create each month, and ensure that your costs have been recorded for each line item that you bill.
Notice in the example report above that there are no values (zero values) in the "Act. Cost" column for the indirect costs, such as fringe benefits, overhead, and G&A. But also notice there is a cost for direct labor. In the "Act. Cost" column, only the direct costs will appear. The allocation of the indirect costs to the contracts will take place either on a spread sheet or through the use of a 3rd-party add-on such as ICAT. Quickbooks does not have an allocation module that will automatically allocate the indirect costs to contracts. Finally, notice that the amount billed for direct labor in the "Act. Revenue" column matches the amount in the "Act. Costs" column.
Cost Plus Fixed Fee Invoicing
Don't make the mistake that I've seen too often by contractors who simply record their CPFF invoices by making a lump-sum entry into Quickbooks. If you are simply recording the total amount of the invoice in Quickbooks, as a single line entry, you are headed for trouble with DCAA. Instead, you'll need to record each line item that was the basis for your price proposal. Typically, you would include a line item for the direct cost elements, such as Direct Labor, Direct Travel, etc. In addition, you would include line items for each of the indirect cost pools that you bill, such as Fringe Benefits, Overhead and G&A. And finally, you would include a line item for the Fixed Fee.
The screen shot above is an example of what a CPFF invoice would like like in Quickbooks. Notice the CLIN # column. You'll need to record CLINs for each line item. The "Item" column is selected directly from the Item List. Also notice there is no "Cumulative Amount" column. This information is obtained by printing a "Sales by Item" report in Quickbooks.