How Your Chart of Accounts Can Make or Break Your Contract Proposals

If you’re a government contractor, it’s important to know how to provide accurate rates to potential clients quickly in order to win more contracts and ensure that you win profitable contracts. Are you prepared to handle this kind of request when it comes up? 

Accurate Rates Start With a Strong Chart of Accounts

As a government contractor, it’s so important to maintain DCAA compliant accounting systems and have your chart of accounts set up correctly so that you can begin the process of bidding on a new contract right away. Your chart of accounts is the foundation of your accounting system. Without the right foundation, you won’t be able to pull the numbers you need out of your books. These numbers are the key to determining your contractor rates. 

Best Practices for Setting Up Your Chart of Accounts

Your chart of accounts is a list of all account names and numbers relevant to your company. Many organizations use Quickbooks to set this up and maintain DCAA compliance in their government contractor accounting. Typically, this will include four different account types: assets, liabilities, income, and operating expenses. When you’re setting up your chart of accounts, you’ll want to assign a name and account number to each account and also differentiate which category each account falls under. Here are some best practices to use when setting up your chart of accounts:

• When you’re creating your business account names, keep it simple, i.e., Bank Fees, Cash, Wages, Rent Expenses
• When assigning business account numbers, commonly used number sequences used to categorize accounts are:
• Assets: 1000 - 1999
• Liabilities: 2000 – 2999
• Income: 4000 – 4999
• Operating Expenses: 6000-7999
• Create sub-accounts instead of adding new line items every time you need to add something. For example, if you need to add a new rent expense, break that category down with sub-accounts for each rent expense you need to log and track. 

You can download our free DCAA chart of accounts template here! 

What Makes a Strong Chart of Accounts?

Now that you’ve seen the simplest way to set up your Chart of Accounts, let’s discuss what makes a strong Chart of Accounts that will make it easier for you to demonstrate your organization’s financial health and win profitable government contracts.

• Keep it organized: Category, Account, Sub-Account. As you add and adjust accounts, avoid adding a new line item for each and every account because that can get messy and confusing quickly. 
• Include financial statements. Add a column for account statements that specifies which statement you’ll be using for each account-cash flow, balance sheet, or income statement. These statements will help you stay on top of your financial health. Your balance sheet will help you manage your asset and liability accounts, while your income statements will provide documentation for your expense accounts. 
• Track account movement. Your Chart of Accounts is a valuable living document that helps you stay on top of your organization’s accounts simply, and, therefore, accounts will need to be added or removed on a regular basis. If you need to add an account, do so as soon as it comes in. If you need to remove an account, however, wait until the end of the year or at least the end of the quarter just in case you need documentation from that account. 

The Three Types of Costs and Why They’re Important

When you’re estimating your contractor rates and managing your Chart of Accounts, it’s important to understand the different types of costs involved and how they’re categorized. There are three different cost buckets used by government agencies to allocate costs:

• Direct Costs – These are costs that are easily identifiable as they connect to the direct delivery of production, i.e., direct labor, travel, materials, and subcontractors. 
• Indirect Costs – These are sometimes referred to as “burdens” because they cannot be easily identified and connected to a specific contract or project. It’s important in your government contractor accounting to understand where these costs lie within your contracting budget and how they’re reported within your Chart of Accounts so that you accurately estimate your eligible costs and land profitable contracts. Generally, indirect costs fall under one of three categories: fringe benefits, overhead, or general and administrative costs. 
• Unallowable Costs – These are costs that the government does not reimburse, such as alcohol purchased at a business dinner. 

Determine Your Wrap Rate to Win Profitable Contracts

If you’ve set up your Chart of Accounts properly and considered all of your applicable costs for the government contracts you’re hoping to secure, it should be simple enough to determine your wrap rate. Your wrap rate is what allows you to determine what you need to satisfy your payroll needs, overhead, and general and administrative costs in order to provide exemplary service to your government contracting clients. It also includes your fee, which is your profit. If you fail to keep up with your Chart of Accounts and underestimate your costs, you could end up in a long-term contract that’s unprofitable for your organization. 

We hope this information helps you gain more understanding of government contractor accounting and your organization’s financial health and win more profitable contracts!