Managing government contract costs, in the strictest sense, means meeting the federal government's published cost accounting standards. In short, this means having a cost accounting system that will track all costs, for any government contract, in accordance with the Federal Acquisition Regulation (FAR) and Cost Accounting Standards.

Managing government contract costs is important from a government audit/compliance viewpoint. But even if your contracts are not of the size/type that requires standards compliance, costs must be managed at a contact/project level to control profitability. The government just wants you to do it in a prescribed, organized way.

A compliant government cost accounting system must:

• Track all costs for any individual government contract
• Accumulate actual direct costs by labor category and job/task
• Accumulate actual indirect costs and allocate these costs using provisional, budgeted, or actual burden rates
• Track and segregate unallowable costs (as defined by FAR)
• Account for uncompensated overtime
• Account for bid and proposal and research and development costs
• Track employee labor by intermediate and final contract objectives
• Generate accurate and timely invoices
• Have an adequate and consistent underlying accounting system

Government cost accounting standards require that a company maintain a job cost system, where the "job" is a government contract. Job costing is usually an afterthought and not necessarily a critical part of a typical accounting system, like, say, general ledger or payroll.

In some companies, the government contract accounting system is a modified job cost module from a manufacturing accounting package. In other companies, the contract accounting is managed through the use of off-line spreadsheets or a separate off-line job cost sub-ledger.

These types of solutions work, but are makeshift approaches that usually result in added costs, accounting complexities, and inaccuracies. Regardless of the system used, indirect costs are extremely difficult to define, collect and allocate.

In summary, contract cost management is a critical function that should be done right, both from a profitability and compliance perspective.