Finance & Accounting – Inability to Demonstrate Cost

Case Scenario

  • A commercial products contractor believed it did not need to implement a job cost accounting system since all products sold to the Government were commercial in character & all pricing was based on commercial catalogue prices
  • Upon award of $XX.XM subcontract under a major Government prime contract, the contractor increased its production capacity & purchased large quantities of materials to take advantage of economies of scale consistent with the prime contractor’s funding & delivery schedule
  • One year after award, funding cuts forced the Government agency to partially terminate the prime contract with consequent termination of the subcontract
  • Although the contractor had properly capitalized its plant improvements & paid for its materials in advance of production & with the prime contractor’s concurrence,
    co-mingling of the cost with commercial work & lack of job cost accounting prohibited the contractor from recovering idle capcity, excess material & other termination costs from the Government
  • The contractor eventually sold the excess material at a loss & absorbed the idle capacity costs

PACFED’s Solution

  • Proper implementation of job cost accounting systems to hedge against pre-mature termination, other customer caused changes & various cost increases in Government contracting is a MUST
  • Commercially available, simple but highly effective job cost accounting systems can be implemented a minimal cost
  • Employee & vendor training need not be barriers to proper implementation of Government cost accounting principals