One question that we frequently receive from companies operating in the government contracting arena is what accounting system do we recommend? The accounting and finance function can provide strategic value and help an organization grow. It should also be efficient and allow for timely reporting to management and other stakeholders. In addition, government contractors are subject to many regulations and reporting requirements that create a need for accurate and specialized financial reporting, as well as appropriate accounting policies. The accounting system that your company uses is part of the foundation of a strategic, effective, and efficient accounting and finance function, which makes selecting an accounting system a very important decision.
QuickBooks is one of the most widely used accounting systems, especially among small businesses. It is a viable solution for many government contractors, and is one of the most inexpensive accounting systems. This is especially important in the current contracting environment that has moved more and more towards Lowest Price Technically Acceptable. Below we will discuss one of the most important considerations when determining an appropriate accounting system; the nature of a company’s contracts and related revenue recognition. We will also discuss a few other factors that should be considered when making an evaluation.
Contracts and Revenue Recognition
Both the type of contracts that your company has and the method of recognizing revenue for each of those contracts are important factors to consider when choosing an accounting system. If your company has primarily Time & Materials (T&M) contracts and has non-complex revenue recognition, then QuickBooks is more likely an acceptable option compared to if your company has cost-reimbursable contracts or fixed price contracts with complicated revenue recognition. Let’s briefly take a look at each type of contract and some items to consider for each. For purposes of our evaluation, we are assuming the company being evaluated primarily provides labor and services to the government.
Time & Materials Contracts
The billing and revenue recognition for T&M contracts is typically a straight-forward process. The contractor will have a contract with agreed-upon prices for different labor categories. For example, a company may have a contract that calls for a bill rate of $108 per hour for a Senior Software Developer. The developer will then enter his hours worked in a given period on their timesheet, and the contractor will bill the customer at an amount equal to the hours worked times the bill rate of $108. The revenue recognized will also be equal to the same amount that was billed. When working in QuickBooks, you can store your bill rate for the developer as an “Item” and easily create an invoice by entering the “Item” and the hours worked in the period on the invoice. This will also record your revenue at an amount equal to the billed amount, which would result in proper revenue recognition. Because of the lack of complexity associated with T&M contracts and this process, if your company has primarily or solely T&M contracts, then QuickBooks becomes a suitable option.
Fixed Price Contracts
The billing for fixed price contracts is typically not a difficult process, as the contract often calls for billing of a fixed amount at a certain interval of time or upon reaching a certain milestone. The main consideration for this type of contract would be the nature of the contract and the services being provided to the government. An example of a fixed price contract would be an IT systems support contract, which calls for six labor categories to be placed full-time on the government agency site to provide ongoing support and maintenance. The contract might call for a fixed monthly payment to the contractor of $80,000 per month for the services provided, for a 12-month period. In this case, the billing and revenue recognition would be very simple. As the contractor, you were required to provide a service level that is consistent each month, and for any given month you earned a fixed amount for those services. When using QuickBooks, you could simply create the invoice for the fixed amount, and both your billed amount and revenue recognized would be accurate based on that invoice. QuickBooks also allows you to duplicate a prior invoice or create memorized templates to make creating the invoice each month even more efficient. If your company’s fixed price contracts are primarily of this nature, this likely makes QuickBooks a good option.
However, many fixed price contracts can lead to more complex revenue recognition. One common example is a fixed price contract with milestone deliverables and billings based on those milestones. In this situation, a contractor might be tasked to develop a new software application for an agency, and the contract calls for payments to be made at the completion of multiple phases. For example payments might be made at the time a working protocol is presented, upon completion of the final application, and upon implementation of the application. In this case, the billing might not be complex, but the revenue recognition likely would be. If you are paid 25% of the total contract amount for finishing the protocol, but that phase internally required 40% of the total cost of the project, then the revenue that will be recognized for this phase will not be equal to the invoiced amount. The contractor should also be recognizing revenue each month, whereas billing might only occur once every several months based on the completion of a milestone. Many of the more sophisticated accounting systems developed for government contractors have project accounting modules designed specifically for contracts such as this. They allow for estimates of percentage of completion, detailed project reporting, and ensure that all costs flow properly to the correct project. In this regard, QuickBooks does not have the same type of project management functionality. Therefore if your company has contracts with multiple deliverables or require percentage of completion estimates, QuickBooks becomes a less suitable option.
With this type of contract, a company will typically invoice the customer based on provisional billing rates. This requires calculations to load fringe, overhead, G&A, and potentially profit on to the direct labor cost. Many more advanced accounting systems specifically designed for government contractors allow you to load billing rates into the accounting system, and the system can calculate the amount to be billed automatically each month or billing period. While there are programs that can integrate with QuickBooks to assist with this process, QuickBooks on its own would not allow for these invoices to be calculated automatically. Therefore you might need to rely on manual spreadsheets or other methods for calculating your billings under cost-reimbursable contracts. In addition, a cost-reimbursable contract will likely trigger the need for an incurred cost submission. Some of the more advanced accounting systems can calculate your actual rates reported on your incurred cost submission, and can prepare many of the reports required in an incurred cost submission. When using QuickBooks, you can design your chart of accounts to make it easier to calculate rates manually and prepare your indirect cost submission. However, there is limited functionality when it comes to having QuickBooks generate these reports and to calculate actual indirect rates. So as you can see from this discussion, the presence of cost-reimbursable contracts makes it less likely that QuickBooks is the best accounting system for your company.
Other Factors to Consider
Certainly, the lower the volume of transactions a company has, the more likely it is that QuickBooks is a suitable accounting system. One of the best examples to illustrate this for government contractors is payroll and labor allocations. If the company has a small number of employees, manually calculating labor allocations based on payroll and timesheets would not be a difficult process. Of course it is never ideal to rely on manual spreadsheets and calculations, but it may be worth the savings in cost from using QuickBooks in this situation. The more employees you have, the more time it would take to do a manual allocation and the more likely you would be to have errors and inaccuracies in your financials. There are many systems specifically built for government contractors that allow for a timesheet entered online by an employee to be imported to the accounting system and a labor allocation automatically calculated. A significant volume of transactions can often be better handled by a more robust accounting system for a more streamlined workflow, a more efficient function, and better accuracy. In addition, the larger the company becomes, the more important it is for management to receive real-time reports that allow them to analyze results and evaluate future strategy. Many other systems have very expansive reporting functionality that QuickBooks may not be able to compare to. As volume grows, the number of different reports typically grows as well and the importance of these reports increases.
Integrating Applications with QuickBooks
Because of how widely used QuickBooks is, there are countless applications and programs that integrate directly with QuickBooks. These programs may give you the functionality and automation you need without committing to a more customized and expensive accounting system. Some examples of applications include:
- Timekeeping programs: There are various web-based timekeeping systems that allow your employees to record their time to jobs and tasks, allow for supervisory approval, and can be imported to QuickBooks for accurate reporting of direct cost, leave, indirect labor, and other labor categories.
- Procurement and CRM solutions: If you are a product reseller or other type of high-volume seller, you can use programs such as Contraqer, which can collect and organize all of your procurement data to streamline processes such as quoting and preparing purchase orders.
- DCAA Compliance Solutions: Certain applications, such as ICAT, will integrate with QuickBooks to set-up cost pools and bases to easily compute rates and allocate indirect costs.
As mentioned before, QuickBooks is one of the least expensive options available. The integrated applications can add to the cost, but even after factoring that in, the cost will still likely be much lower than some of the alternatives such as Deltek and Microsoft Dynamics. In addition, with the more robust systems you might be looking at significant costs for implementation and customization, ongoing maintenance and support, and you may be locked in to a commitment for over a year.
There is no hard-and-fast rule to determine if QuickBooks is the accounting system that is most suitable for your company. We discussed above that cost-reimbursable contracts might lead you to a more advanced accounting system than QuickBooks. However, if you have only three small contracts and one is cost-reimbursable, the additional cost of another system compared to QuickBooks might not be worth the additional expense. There might also be other systems or applications that you can integrate with QuickBooks to achieve what you hope to by using a more robust accounting system. And there is no way to say that a company that has over a certain threshold of revenue should no longer be using QuickBooks. Sometimes a $10M company can be less complex and have the same volume as a $3M company. Management should also give consideration to where it thinks the company will be in one, three, and five years to determine if an investment in a more expensive and possibly customized system is worthwhile.
Contact us if you have any questions or would like to learn more about other accounting systems and available alternatives.