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PPP Forgiveness, Indirect Rates, and The Incurred Cost Proposal
Mike LeJeune (00:00):
Hey podcast, listeners, hope you’re doing well and I hope you are winning contracts. Before we get into today’s
episode, I want to take a minute to share something with you that’s working for our clients. Our federal access
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Mike LeJeune (00:57):
Visit federal-access.com/game-changers today and get started for just $29. You’re going to get access to a
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changers so you can get started for just $29 today. Now let’s hop into this episode.
Game Changers Intro (01:45):
Welcome to game changers for government contractors. Game changers is dedicated to helping you position
for it and win more government contracts. And now your hosts, Josh and Mike.
Mike LeJeune (01:55):
Hey everybody, Mike LeJeune here with game changers for government contractors, and we have an old friend
guest here. Uh, Mr. Robert Jones is on, Robert did an episode a while back, uh, and now we’re bringing him back
on to talk today about developing your first cost and price proposal. So Robert, why don’t you jump in and tell
everybody a little bit about who you are and what you do.
Robert E. Jones (02:18):
Sure. Well, thank you again for the opportunity to come back. Uh, again, my name is Robert Jones. Uh, my firm
is Left Brain Professionals. Uh, we’re a boutique accounting firm that works strictly with government
contractors, uh, practice primarily accounting system design, implementation, and audit support. Uh, some of
the tasks that we help clients with are things like indirect rates and the cost and price proposals that we’re
going to chat about today.
Mike LeJeune (02:44):
Yeah so thanks again for coming back on Robert, you know, one of the things that I always want to tell people
right out of the gate before we get going in an episode like this, when we have specialists on here, is anytime
you are a government contractor, you want to make sure you’re working with folks who specialize in
government contracting. So, you know, whether it’s an accountant, an attorney, whatever it may be, you can’t
just use the regular folks off the street for this. You know, the guy that does your will is probably not the best
guy to negotiate government contracts, well he might be but probably not. So I love having specialist like Robert
on here, who, as he said, right out of the gate, they’re boutique firms specializing in this government contract
space, because you’re going to get advice today that is specialized not generalized. And so I really appreciate
that, that we’re going to talk about today. So why don’t you kick us off and tell us what exactly is a cost and
price proposal, and why would a contractor create one of these?
Robert E. Jones (03:36):
Well, a cost and price proposal is really a complex and comprehensive document kind of in comparison to a lot
of government contractors as they get started, particularly a subs might be a originally and they might get
started with some small dollar value contracts, typically would be fixed price, you know, firm fixed price
approach. And while there may certainly be some details and those type of proposals that they put together,
uh, when they’re going after a large dollar value, think of things, you know, a greater than $2 million and things
that are going to be a negotiated, or if it’s going to be on a cost type of contracts, something like a CPFF, a CPIF
or CPAF contracts cost plus fixed fee cost plus incentive fee or cost plus award fee, right? The nature of those
contracts and proposals is cost. So in order for the government to do an evaluation of the proposal, then the
contractor has to submit cost data. And, that’s in comparison to a fixed price contract where the contractor
submits only price level information.
Mike LeJeune (04:41):
So, what are the key elements of a cost and price proposal?
Robert E. Jones (04:44):
So the key elements, um, are it’s really about the details. It’s about getting into the details of labor material,
travel, ODCs and subcontractors, depending on how the contractor is proposing the work, uh, as well as the
specific details that are required in the RFP. Typically, for example, when we talk about labor, uh, you need to
indicate the specific labor categories. Keep in mind that again, from an RFP perspective, and especially in
situations where the government is buying services from you, they may have predefined labor categories. So
you need to make sure that the employees you’re proposing actually meet the requirements of the labor
categories you’ll provide, uh, you know, hours dollars, that kind of information, uh, for each of those labor
categories. For, you know, when we start talking about materials, you need to be able to provide quotes, to
support a significant portion of that material, our general guidance, and that you’ll find from again, other
professionals in the field is we usually say you need quotes to support about 80% of the cost of what you’re
Robert E. Jones (05:51):
And that is typically for most situations, you know, 80% of the cost can be found in about 10 to 20% of the
actual quantity of material. So even though 80% sounds like a lot, the actual number of quotes you need to get
may not be that many, uh, as we get into the other pieces of travel, um, make sure that you’re using GSA
information for your per diem and lodging, you know, hopefully, you know exactly where you’re going. That’s
usually called out in the RFP. So you’ve got some, uh, defined place of performance that you need to travel. So
it’s easy to, again, to get that GSA information, obviously for things like airfare, rental, car, fuel, parking and
tools, you’ll just have to use your best estimate. We all know that, uh, airfare and rental fees, you know,
fluctuate for various reasons. Uh, so the best thing you can do there is just get an estimate, uh, and document
Robert E. Jones (06:45):
ODC, so those other direct costs are usually minimal, might be some little things if maybe the travel or the
nature of work that you’re doing requires installation of your product. Um, you know, it might be some small
hand tools or other, uh, minor, uh, expenses like that. And then the other potential big thing for cost and price
proposal are the subcontractors. You know, there, again, can be a lot of information. If you are giving out a fair
portion of the work to somebody else, then they’re going to be submitting a detailed cost proposal to you that
you need to evaluate and include those details in your proposal to your end customer.
Mike LeJeune (07:24):
This sounds like a lot of information here and one of the things that’s kind of running through my mind is what
should the format of this be? And like, how should, how should you compile this to give to the government? Is
there some recommendations on that or even guidelines?
Robert E. Jones (07:38):
Yeah, it’s an excellent question. Uh, and Michael you’re right. It is a lot of information, uh, obviously the larger,
the dollar value of the contract, the more information, um, that’s here. A lot of times when we’re talking about
large dollar value contracts, we’re also talking about contracts that have a significant period of performance,
something greater than 12 or 18 months. Um, you know, you may be quoting or should say, you may be
proposing, um, you know, a contract that has a base year and, uh, and potential option years of two, three, four
or five option years. Uh, so yes, a lot of information. And then, you know, how do you organize that? Uh, again, I
always drive people back to the RFP, make sure that you’re reading the RFP because oftentimes there are very
specific requirements on the format, uh, including, uh, the file types and sizes.
Robert E. Jones (08:28):
So you want to keep that kind of information in mind typically, um, the contractor can submit stuff in their own
format as long as they provide the required information. So it’s not so much that there is a specific form
though. Again, be very careful because we have seen from some agencies or offices that they do want a specific
form filled out. And maybe in addition to that, you need to submit, you know, supporting documents. But again,
typically the contractor can submit their own form as long as they provide the information. One of the key
things to look for is the information in FAR 15.408 uh, in table 15-2 that provides a cost element breakdown.
Um, and what you want to look for there is making sure that you’re providing quantity and dollars. Quantity
could be quantity in terms of materials and number of trips.
Robert E. Jones (09:20):
Quantity could be the number of hours when we’re talking about labor categories. Again, you want quantity
and dollars by labor category by CLIN, uh, by year. So this B really turns into a matrix. Um, if you could imagine
in front of you, if you were to try to start to draw out a matrix down the left hand column, you would list things
like labor, the individual labor categories, materials, the individual materials, same thing for travel OTC,
subcontractors, and then in your columns, going across the worksheet, you would have things again for
quantity dollars subtotal, you would have that group by years. So again, if you were proposing, let’s say right
now, uh, you were proposing something with a base year and four option years. And let’s just say that that was
going to be a base year, beginning, January 1st of 2021. You know, then you would have, uh, five big groupings
going across for 2021 through 2026. You’d be able to subtotal, uh, for example, underneath of labor materials,
each of those main cost elements, you’d be able to subtotal by year, be able to do “total totals” is what I like to
call them that far, right. Total most right column. And then we have what I call my “total total totals” which is
that bottom right hand corner going, if you can kind of envision this spreadsheet in front of you, that “total total
totals” on the bottom right hand corner is your final cost down there for everything that you’re proposing.
Mike LeJeune (10:44):
When I’m thinking about the spreadsheet and everything that’s going in it, I know there’s one area that I know a
lot of people struggle with, and that is the profit section. And, you know, we, it’s something we have to disclose.
So how should a contractor address this?
Robert E. Jones (10:59):
You know, that’s always an interesting question. It’s very sensitive, I think on both sides of the table for the
contractor and for, you know, their customer, whether their customer is the prime or directly with the
government. We’re all in business to make money, right? At the end of the day, we’re all in business to make
money. And how do we make money, right? We propose profit and fee on top of the costs that, you know, that
are incurred for us to deliver our product or service. You know, contractors, you know, are very sensitive. They
don’t want somebody to necessarily know how much money they’re making, however, in the world of a cost
contract, because you are submitting that cost information, then you also have to submit the profit information
related to that. I like to insert here that you should only be sharing profit information in this kind of
environment where it really is a cost type contract, where there is cost analysis being performed.
Robert E. Jones (11:51):
If you are submitting a proposal for a fixed price contract. So you’re submitting only price information in your
proposal and the contract, and whether it’s the contracting officer or the prime is going to be performing price
analysis. In that situation, you should never disclose profit as a separate item because that is a separate
element. And when, when that other party is performing the price analysis, they’re looking at the top level and
comparison what we’re talking about here is cost analysis for a cost type contract. So you do need to submit
that information. So then the question becomes, well, how much do I propose? And so what I tell people is that
there are one, there are only three limitations in the FAR, um, for profit and fee. So this goes across the board,
uh, as we talk about contract types, uh, the first is that R&D work on a CPFF or a cost plus fixed fee contract
shall not exceed 15% of the contracts, estimated cost excluding fee.
Robert E. Jones (12:52):
One thing I also like to remind people here, when we talk about cost plus fixed fee, that fixed fee is key. And
keep in mind that as you approach the cost ceiling, on a fixed fee contract, you may hit that point where you say
we only have 25% of the funding left, but we’ve got 35% of the work to do. So we need a little more money. You
ask the government or your prime for additional money. They may give you additional cost money, but they are
not required to give you additional fee or profit money. Again, it was a cost plus fixed fee contract. One of the
other limitations, this one is a little more tricky in the way it’s worded so bear with me on this. It’s for architect
engineer services for public works or utilities, um, and it states that the contract price for the AE portion, the
contract price, not the profit, but the contract price for the AE portion cannot exceed 6% of the estimated cost
Robert E. Jones (13:46):
So let me give you a quick analogy. Let’s say you’re an AE firm who designs bridges, right? Uh, the government
is coming to you to design that as an architect engineer from, uh, your total contract cannot exceed 6% of the
cost of the estimated cost to build that bridge. Uh, the third limitation that you’ll find in the FAR and I should
have said, that you find all of this in FAR 15.404-4. The third limitation that you’ll find in there is for all other
costs plus fixed fee contracts. Uh, and that fee shall not exceed 10% of the contract estimated costs. So, um,
there’s a couple of myth busters I’d like to put in here. You’ll often hear, I certainly still hear it. And it disturbs
me. We hear contractors say, “Well, somebody told me I can only propose 6% or 8%”. Or, you know, sometimes,
specifically there’ll be some primes who put out their RFPs to their subcontract base and say from the
beginning, “We’re only going to give 6%.” and that’s just not appropriate. It’s not the right thing to do. There’s
no regulatory requirement behind that. Um, unfortunately it happens. Um, and my best advice for contractors
is to push back. Again, you’re right. Michael, it’s always, it’s always a tough conversation to have.
Mike LeJeune (15:00):
Yeah. I think anytime you’re talking profit, it, it really makes people nervous. You know, they don’t like to talk
about the profits. People don’t like to talk about numbers in general, but profit is one that definitely scares
people. And I’m glad you brought up the myth busters because I think as a word of caution to anybody who is
in this industry, anytime you hear, “I heard” followed by whatever you need to go check it out.
Robert E. Jones (15:25):
Amen to that. Yeah, you’re exactly right.
Mike LeJeune (15:27):
Yeah. I mean it, but isn’t that, like, I can’t tell you how many times somebody will call me up and say, “I heard
that…” And they say something. And I usually say, “I’ve been in this business for 20 something years. I have
never heard that”, or “I understand what you’re trying to do and that’s not right”. You know, that’s, you know, I, I
had somebody the other day, it was a total innocent question. They didn’t know where this was coming from.
And it was about, uh, “Hey, you know, I was thinking about putting my wife in charge of, you know, forming a
new company, putting my wife in charge of it so that we can get the woman owned status”. And I said, “Well, is
she gonna run it?”. He was like, “Oh, well, no”. Yes, let’s have that conversation. And I started going down the
rabbit hole with him and he’s like, “I didn’t really, I thought, I just thought, this is what you did. I like, I heard you
could do that”.
Mike LeJeune (16:12):
And he’s like, “She actually has three other businesses”. And he’s like, “Well, I thought we’d start this fourth
one”. Cause he has a couple that are separate from hers as well. So these are serial entrepreneurs. This isn’t
like people who are completely uneducated on business. And they were just saying, “I heard from a friend that
you could do this with the government”. I’m like “You, no, we’re not going to do that. And here’s why”. You
know, but it, I mean, that’s a simple example, you know, can you imagine some of the ones that come out in
this. To me, I think you have one of the toughest jobs in the industry because anytime people see anything
numbers related, a lot of people, you know, their eyes just kind of gloss over and start drooling type thing.
Cause it, you know, you see the numbers and the spreadsheets and all this stuff and it really can, you know,
make you crazy a little bit. And the, the other thing about it to me is there’s so little room for error. And that’s
why I talked up front about having somebody who is an expert in this industry doing this because you need
somebody who understands the industry, understands pricing, understands, you know, all the stuff you’re
throwing out there that I’m sure a lot of people are like, “I’m going to have to go write this down later”. They’re
in their car because there’s so many little things, but you know, that’s why we have experts so…
Robert E. Jones (17:28):
Well, and I want to jump on something that you said there, as we talk about fee and profit and kind of little
room for errors, what triggered it for me if you are proposing or otherwise negotiating 10% or less for fee. I’m
not saying that that’s an inappropriate answer because again, there may be stipulations around that, but even
at 10%, you have to keep in mind. And this is one of the things that I always, when I educate people on both
sides of the table, whether it’s contracting officers or contractors, there are things that come out of profit or fee
that, uh, people who don’t understand accounting, forget about. You know, if you just say, “Hey, well, you know,
I negotiated 10%”. If you’re the contracting officer or the prime and you say, well, “I negotiate a 10% fee to the
sub, they should be happy they’re making 10%”. Well, they’re not really making 10% because there are things
like income taxes, unallowable costs, cost overruns, other things that actually come out of the 10%. So they’re
not really making 10%. And then the other thing is that 10% doesn’t even, whatever’s left, so let’s say there’s
eight or eight and a half percent. That doesn’t mean at the end of every month, they get to write themselves a
check for 8 or 8.5%, right? They’ve got to keep the cash in the business so that the business is solvent, right?
They’ve got a, an outstanding accounts receivable that they need to find. They have payroll, credit cards, other
things that they need to pay as they continue on. And, you know, even with a small business, while you should
be getting paid in a timely manner, it’s not uncommon. And to, there are other factors that come into place
such as the types of contracts, um, or, you know, you may negotiate different payment terms. We oftentimes
see that even small businesses may be net 30 net 60 on getting cash in hand. So just because you negotiated
some fee again, at the end of the day, doesn’t mean the owner is able to take it out. That cash still remains in
Mike LeJeune (19:13):
Yeah. Really, really good points there. You know, I think cash management at, at a high level is such an art form
for a lot of these small business owners, especially when you’re juggling multiple projects, you’ve got staff,
you’ve got, uh, like you said, the accounts receivable could be 30, 60, 90 days out, who knows. Uh, so it really is
an art form to manage your cash and to do it really well. So one of the things, as you were kind of going
through and talking about the spreadsheet, something that kinda popped in my mind here is I always see
contract— I’ve seen mistakes here that really crush a contract in at second, third, fourth year. If it’s a multiple
year contract, talk to me a little bit about the pricing to kind of take that into account. So we’re, you know, we’re
doing a multi-year deal here, you know, how do you handle the costs rising over a couple of years? Not only for
like products or whatever, but deal the labor and all those kinds of things, because you know, people get raises,
costs go up that sort of thing. And again, I know people probably have any general concept of this, but talk to
me about how you do that in this part of the proposal.
Robert E. Jones (20:17):
Yeah. So really there’s a couple of key things here. Uh, the first is the budget. Um, and what we find is that
many, probably most small businesses don’t prepare a budget, which is unfortunate. Um, because if you don’t
budget for success, then you may not achieve success, uh, in simplest form. But if you’re not looking at what
your known costs are, what your expected costs are, then how do you know how well you’re doing? How do you
know how to manage that cash? And when to hold onto it? When we talk about budgets, we actually like to talk
about budgets from two perspectives, one being talked down and the other being bought.
Robert E. Jones (20:54):
And in reality, the best budget is using both of those approaches. So you have to look at, from the top down is,
you know, what is your backlog? What is the known work that’s already on your plate? And what is it going to
cost you to deliver that work again, whether it’s products or services doesn’t matter, but what is it going to cost
you to deliver that work? And then from the bottom up, it’s looking at, okay, what are the known expenses that I
have, right? So you’ve got rent, you’ve got employee. I mean, you’ve got salary employees, you got fringe
expenses and other things. And then you have to marry those two things together. And then you have to start
tacking on, well, what if I win this other contract or what other proposals are out there? And what is our, you
know, what’s our typical win ratio on those? When do we think that they’re actually going to be awarded?
Robert E. Jones (21:37):
And you got to factor in all of that stuff. So part of the answer back to your question is when you’re looking at
future years, you’ve got to build a budget in general. And hopefully you’re building, you know, a two, three, four
year budget. Now, yeah if, if, if I had a crystal ball and can tell you what’s going to happen in four years, Michael,
I wouldn’t be on this call with you today because we’re on this podcast with you today because I’d be making
millions of dollars from somewhere in a very warm location, telling people the answers to the questions they
need to have. But what we can do is apply the best information that we have in our hands, right? So we can
look at history. Um, and if you’ve been in business for a while and you go back and read, for example, you track
your indirect rates, you know, what’s going on.
Robert E. Jones (22:17):
Even as you build a budget in the future, you got a sense of, “Hey, our rates are on target with where they have
been, or they’re on target with where we’re going”. Again, knowing your industry, uh, knowing some sense of
when contracts, you expect them to be awarded. All of those things will affect, um, your basic rates that you put
together. You know, one of the comments that you made is, um, you know, what do you do about salary
increases, right? So we should know what that kind of stuff is. When we talk about healthcare expenses, you
know, again, if you’ve been in business for a while, you have a general sense of what’s happening with your
fringe expenses over time. The other factor, and I said there were two factors, the first being budgets, as we
look at future years, the other factor is the unknown of escalation, right?
Robert E. Jones (22:59):
So we don’t always know what’s going to happen in the economy. Um, I’m pretty sure that on January 1st of this
year, uh, probably even on February 1st and maybe on a March 1st, none of us really had a sense of what
COVID-19 was going to do and the impact it was going to have on our economy and on our daily lives. So
because of things like that, again, none of us can really know what’s going to happen two, three, four years in
the future. But what we can do is look at historical information and we can see what has happened with
escalation over time. And by escalation, I’m saying, you know, we’re talking about the overall rise or fall in the
cost of doing business. Our recommendation, when we talk about escalation, um, is one that you break apart,
any labor and materials, uh, primarily because those markets can be very different, especially if you’re working
in different types of materials. Uh, the industry that you’re in, um, the geographic location, there are a lot of
factors that come into play when we talk about labor, So you wanna make sure that you factor that into your
labor, escalation, when we’re talking about materials, uh, again, the industry, the raw materials that go into the
products that you buy, I’m going to have a significant impact on the escalation rate. So if you are one of those
contractors that you heard, as we were talking about, Michael, if you heard, Oh, just apply 3% or just apply, you
know, 5% across the board. One, if you, if you put a flat round number out there and you use the same number
in all future years, that’s a big flag to auditors, and they’re going to see that it’s an unsubstantiated number by
just putting some round number out there. And in fact, again, if you don’t break down that difference between
labor and material, you might actually be leaving money on the table, even if you negotiate escalation. Because
again, when you take a single factor and apply it across both of those, again, primarily looking at labor and
material, one of those may have a significant, uh, increase or decrease that could otherwise affect a blended
Mike LeJeune (24:54):
As I’m listening to you go through all this. That was one of the things that popped in my head was this is one of
those areas. And you said it were done poorly or using the, I heard I should do the flat 3% where you leave
money on the table. When you make other mistakes, like you said, the red flags. And I think that’s where people
really need to pay attention to this part of the podcast, because those are the things that lose a deal. Creating
red flags loses a deal. You’re leaving money on the table, may not lose a deal, but it may bankrupt you, or at
least make things really, really tight in a future year. It could bankrupt you if you did it really poorly. I-I’ve seen
things where people don’t take into consideration that third, fourth, fifth year, and they start going into that
year and they’re like, “I can’t pay this guy. I’m going to, I’m going to, in order to stay on this contract, I’m going to
have to swap this person out and it’s going to really make the client mad, but I didn’t take enough into
consideration here”. And now they can go get a job and get a 20% bump in pay.
Robert E. Jones (25:52):
And, you know, no, that’s one of the common things that we hear from existing or potential clients, uh, that we
talk to is they’ll say, “Hey, we’re doing work on a contract, you know, we’re billing or getting paid, but at the end
of the month, there’s just not much money left over. You know, we don’t, we don’t quite understand what’s
happening”. And when we dig into it, we usually find, um, a couple of problems. One of the primary ones is
usually with their indirect rates, the, the indirect rates are calculated incorrectly. Um, and so right, if you, if you
do an improper calculation from a cost perspective, then the price you proposed is going to be incorrect. And
as I tell people in my nearly 17 years of doing this, I haven’t found anybody who’s accidentally overcharged at
the government. It’s, it’s a situation where they’ve undercharged and left money on the table and cost
themselves a lot of money.
Robert E. Jones (26:42):
You know, in fact, we had a client a couple of years ago who called with that same thing I actually went on site,
spend a day and a half. There was talking to them. And just in talking, not even open up, not even looking at any
of the numbers of worksheets, but in talking to them, we uncovered that they were not billing any of their
overtime. Now they were paying the overtime to be clear, right? So the employees were getting paid. It was on
the payroll records. It was in the general ledger. However, there was a huge disconnect between the accounting
department and in their case, the program department, who was actually preparing their bids and proposals
and how they were proposing their costs out. And this was a situation where the company was on average,
experiencing about a 15 to 20%, uh, over time, year, over year, it was the nature of their combination, nature of
the geography and the industry that they’re in. So there was 15 to 20% of their labor costs really that they were
never accounting for in their price.
Mike LeJeune (27:38):
You know, this is a, a, a good time for me to jump on my soap box here. Being in business is not about revenue.
It’s just not. It’s about profit at the end of the day. You know, I, I see so many times where companies are so
focused on that top number. We’ve got to get to 5 million, 10 million, whatever, but what if you’re a five or $10
million company in? You’re still making the same amount of profit you’re not moving forward. You’re, you’re
really neutral. You just have a lot more revenue and a lot more to juggle. And so I think it’s so important that
you pointed that out about the clients that come to you, that at the end of the month, they just don’t have a lot
of money left over. Cause that’s another one of those I heard that people tell me all the time is, you know, I
thought about getting into government contracting, but I heard there’s not a lot of money in it.
Mike LeJeune (28:22):
There’s not a lot of profit and right. Well, when you do it wrong, there’s not, you know, that’d be, that’s the
bottom line when you do it wrong. There’s not a lot of profit. And so being able to, you know, as they say,
sharpen the pencil here and really understand what’s going on in those spreadsheets is a big, big deal. So as
we’re wrapping up here, why don’t you kind of you know, send us out with telling people, how can the
contractor ensure that they’ve developed a complete and adequate cost and price proposal? Because I think at
the end of the day, there’s a lot of opportunity for mistakes, but there’s also a lot of opportunity for hidden
gems in this thing. So if you could wrap us up with that.
Robert E. Jones (29:01):
Yeah. So I guess I would have a couple of items. Uh, again, first and foremost, read the RFP. Um, we just never
can stress that enough, provide the viewer, the reader on the other end, the information that they want and
need kind of back to your comment earlier that deals can be broken simply because you didn’t provide the
information. At the very least, you ended up dragging out negotiations, uh, which ultimately, you know, delays
contract award and causes problems on both sides of the table. But, but read the requirements of what’s in
there, make sure that you go through with a fine tooth comb, always have somebody from the outside, look at
it and run the calculations. Again, we talk about today here from the cost and price perspective.
Robert E. Jones (29:44):
When you put together all the numbers and the worksheets have somebody who didn’t prepare, uh, go
through it, have them cross check and validate some stuff. And probably the last thing is kind of what we
opened up with Michael. And I say the same thing. You have to hire somebody who knows government
contracts. Again, whether it’s an accountant or whether it’s an attorney. And in fact, you’ll probably keep your
existing accountant and attorney, but you need somebody in your court who knows government contracts, who
knows the ins and outs of this. And one can keep you legal and can keep you profitable as well.
Mike LeJeune (30:17):
Yeah. Great advice there. And I’m going to close with this and just because you bring on a specialist, you know,
that’s going to do this stuff. Doesn’t mean you get rid of that accountant.
Robert E. Jones (30:27):
You, you kind of said that, but it also doesn’t mean you take the basic accounting in your taxes and put on the
shoulders of this person, you know, use the, use your team for what they should be used. You know, it’s like
using your team wisely is really, really important. And we don’t need, you know, Robert doing your taxes. We
need Robert in the spreadsheets or his team in the spreadsheets of this stuff, helping with things that are a
specialist area. And so, you know, it’s okay to have a bigger team. You don’t need to consolidate folks. In fact,
you know, you should look at it from the perspective of everybody plays their own position on the field, and it’s
good to have multiple players on the field and getting those that different feedback. So really great stuff today. I
really appreciate it. Robert just fantastic stuff is always, uh, as usual, all of Robert’s information will be on our
website. So links and emails, phone numbers, all that kind of stuff. So if you’re driving in your car, don’t worry
about writing that stuff down. It’ll be on there for you. You can go get that. So thanks again, Robert.
Robert E. Jones (31:22):
Game Changers (31:25):
Thanks for listening to game changers for government contractors. For a full list of episodes and other
resources, be sure and check us out on the web at www.rsmfederal.com/gamechangers.
Robert Jones – Accounting Systems Interview on Game Changers Podcast
March 13, 2017
Welcome to Game Changers for Government Contractors. Game Changers is dedicated to helping you position for and win more government contracts. And now your hosts, Josh and Mike.
[00:00:00] Mike LeJeune: My name is Michael and I will be your host today on Game Changers. I want to get right into the show by welcoming our guest Robert Jones. Robert is the founder of Left Brain Professionals. Robert welcome and please take a minute to tell our listeners a little bit about yourself and your company.
[00:00:12] Robert E. Jones: Thank you Michael. Just a quick background on me. A mixture of government contracts and
accounting -and I really work where the two come together. Some people see government contracts and accounting as separate functions. But as you dive in into government contracts especially the various types of T&M and cost plus, understanding the contract type and the regulations really does a lot to drive your accounting system set up reporting and other functions.
[00:00:44] Mike LeJeune: When your small this is very intimidating, am I right?
[00:00:51] Robert E. Jones: It is intimidating. My general experience is that a lot of small business owners are very good at the product or service that they provide but they struggle with a lot of those back-office functions of – accounting kind of being near the top of the list. And then when you add in the complexity of government contracts on top of that it’s even more bewildering for a lot of people.
[00:01:30-6] Mike LeJeune: Yea – So especially if you’re if you’re brand new to government contracting and listening today, I think we’re going to try to demystify a lot of this stuff and make it a lot easier for you to really wrap your mind around. because the topic today is implementing an approved accounting system. I think when most companies think accounting systems they think they think in either very simple terms like QuickBooks or something like that, or they think in very complex or enterprise level stuff such as SAP, Dynamics, Sage, or some other big
system. But the consistent thing that most companies face is they don’t know where to start – especially in this realm of getting an improved system, or should I say government approved systems so let’s dive in and give folks some basics of why this topic is so important to government contractors.
[00:02:02] Mike LeJeune: First off what is an approved system so an improved system?
Robert E. Jones: So, an approved system is more than a software. Some people think that if they simply buy a brand name software that all of a sudden they’re magically going to be approved and that’s not true. Your accounting system includes the policies procedures all of your software that relates so it’s not just accounting whether that’s QuickBooks or some other program. But if you’re using a timesheet program or project management program or anything else that connects to your accounting it affects that data. All of those become part of your accounting system as do any of the reports in any previous audit results. So, whether you’ve had an external or internal audit could even be a financial audit that you know a lot of companies get audits or reviews of their financial statements. The findings from those all come into play because you have to have a GAP approved system and you know there’s a lot of pieces of the puzzle and the results of those can help auditors understand what’s going on in your business.
[00:03:14] Mike LeJeune: I am familiar with GAP. I don’t know if everybody who is listening on here is. can you explain that a little bit for folks?
[00:03:22] Robert E. Jones: Sure. So, GAP is the generally accepted accounting principles. It’s the basic principles that everybody is supposed to follow. There is a – you know especially if you’re a large company and there are a lot of there are a lot more regulations especially if you’re a publicly traded S.E.C. and things – The Securities and Exchange Commission come into play. But even as a small company there are a lot of fundamental accounting policies or procedures that we’re supposed to be following. And then if you’re a government contractor, things like FAR 31, which is the Federal Acquisition Regulation FAR 31 and deals with cost principles, the DCAA, which is the defense contract auditing agency they’re often viewed as the primary. Government auditors – certainly if you’re in the DOD realm they have their own policies and procedures audit guidelines that they do. You have CAS which is which are the Cost Accounting Standards.
[00:04:30] Robert E. Jones: that kind of overlay. And if you think in terms of you try to compare FAR 31 and CAS to GAP remember I said that gap. There are some more stringent guidelines for a very large companies and so CAS is kind of the equivalent if you’re a very large company you’re going to have to comply with all aspects of CAS. But even as a small company you may not have a CAS covered contract. There are some principles within CAS that you still need to follow.
[00:05:00] Mike LeJeune: And I think this leads perfectly into my next question of why do government contractors need an improved system in use? You started to touch on some of those but what are what are the basics. Why did government contractors need an improved system and what are the benefits of that?
[00:05:16] Robert E. Jones: Well primarily the government wants to know that you are spending their money appropriately, that you are properly tracking your expenses, that you’re accumulating all of your cost appropriately, that you’re segregating direct costs from indirect costs, and that your indirect costs are being properly allocated to your final cost objectives. So, you could direct costs are essentially those things that are spent directly servicing your customer – whether it’s providing the service in the form of labor or could be materials travel ODCs or something else that’s directly relatable to an end project. Your indirect costs are things like Fringe, which is your health insurance and employer taxes, overhead which are those expenses that you need to support clients in general. It’s not expenses that are directly attributable to a contract or a project, but you know the expenses that you have to
incur basically you keep customers happy to manage those things. The other primary pool is G & A which is your general administrative and things like your I.T. department, your accounting department, H.R., and the government just wants to make sure that you’re accumulating all those costs appropriately and you’re allocating them out appropriately to all the contracts.
[00:06:49] Mike LeJeune: Yeah, I mean it totally makes sense. I want to back up for just a moment because this a little rabbit trail here, but I think it’s super important for a lot of people is there are there people who are listening, who are brand new to government contracting but I’ve actually run into clients that were 60, 70, and 80 million-dollar companies that didn’t have an approved accounting system. I mean I don’t know how you get that big without that but there are companies that big. When does this come into play for government contracting? Is it on certain contract types? Is it all contracts across the board? When do you really need to look at getting this approved accounting system when you’re in a government contracting space?
[00:07:30] Robert E. Jones: That’s a great question and it’s funny that you mention you know companies that are 60 and 80 million dollars that don’t have it. And that’s true. It’s not terribly uncommon to come across you know a good medium sized company with significant revenue that doesn’t have an approved system. Sometimes that happens because they have a mixture of government and commercial work. Maybe they haven’t had enough government work to be on the radar to have an approved system. But the real factor that drives that is the contract type. So, if you are doing T & M, which is time and materials, or a cost reimbursable type of contract, that might be a cost-plus fixed fee or a cost plus or award fee or cost-plus incentive fee, you definitely have to have an approved system for that. And that’s true at both the prime and the subcontract level. So, some people think oh I’m never going to be a prime I don’t have to have an approved system and that’s not true. If you are a subcontractor and you’re doing cost reimbursable work to a prime on a government contract. You used to have an approved system.
[00:08:42] Mike LeJeune: I think that is a huge point for people to understand because I think there are people who started listening to this and said, “Well you know, we’re probably just going to be a sub most of my life.:” and then they heard that and went. “Oh, I better pay attention.”
Robert E. Jones: It is a big distinction and it’s also important for subs because even if I’m with you I hear I hear clients sometimes say I’m always going to be a sub I don’t have any interest in being a prime. But a lot of companies you know they think for a while and then they get a taste of the government contracts and they realize they like it and they realize they want to do more. And sometimes their customer or somebody else invites them to be a prime sometimes the prime that they were working with kind of steps aside and you know it gives them an opportunity to step up. And so even if you’re a sub I’m always about continuous improvement and looking forward to the future. Don’t wait until you’re ready to bid on that contract and you haven’t done any of the homework to prepare yourself. There are a lot of these pieces of the puzzle that you can work on over time so that when you do decide to go after a prime contract you’re prepared. There’s another interesting piece in here as well that has to do with these large MACs or GMACs which are those multiple award contracts. So if you think some of the big GSA – big contracts like that, even if the type of work that you do and you’re in you only expect to be awarded a fixed price task order, the
fact that the contract itself issues T & M and cost reimbursable task orders means that you still need to have an approved system in order to bid on that and you’ll see that in these RFPs that come out that having improved system is either required we’re strongly encouraged and it gives you more points in the evaluation process because the government has the potential to issue all three of those contract types.
[00:10:56] Mike LeJeune: I think it’s very important for people understand that while in just getting one, just getting ahead of the curve on that because wouldn’t it be horrible if a contract opportunity shows up on an RFP and you’re going through and you’re a perfect fit except you don’t have an approved system? And that’s the one thing you know in a lot of times contracts are very competitive. So, every edge you can get is very important and so something like this that you could do and just choose not to, you wouldn’t want that to limit you getting a contract. So, I definitely agree in getting ahead of the game on that. So how do contractors get approval for their system.? Because the thing that you tricked me right out of the gate in this conversation was it’s not about the software. The software is just a piece of this. It is going down a Wal-Mart and grabbing a copy of click books or getting online and grabbing a copy of whatever. This is much more complex than that. So how does a contractor get approval for this system?
[00:11:55] Robert E. Jones: Well first of all I want to be clear that if you do research you’ll come across some vendors who all but guarantee you approval. They say they have a DCAA approved system and they make it sound as if you install their system you’re golden and that’s not true. Again, back to the first part, it’s more than just the software but the government doesn’t approve you as well when they’re looking at stuff they say, oh you use xyz software, you’ve got a leg up. That’s not true.
[00:12:29] Mike LeJeune: I recently talked to a contracting to an auditor a government auditor and she had audited a company that uses one of the big brand name software and the client had failed. And she’d also recently audited a company that was using a small QuickBooks, we’ve already mentioned them, but they were using QuickBooks and got approved because they were doing all the right things. The real key is to make sure that you understand that it’s not the software that approves it. Even if you have an auditor say DCAA is your auditor, it’s not DCAA that’s actually approving your system. They are simply performing a survey of your system and making a recommendation. The contracting officer is the person who makes that final determination. They take the feedback from the auditor in the report and make their determination from there. And with that I want to add in] a lot of people know the DCAA is backlogged and has been for a long time and all of their audits trying to get DCAA to come in and do an audit can be very difficult – especially if you are small you just may not be big enough for them to be on the radar and somebody really pushes. Also, you cannot call DCAA and ask for an audit. It has to be requested by the contracting officer. So, then people say well what happens in that case? I’m a small contractor. I’m going after this cost reimbursable contract. I have to have an approved system. DCAA., you know, I’m not on their radar I’m too small. They’re not going to come see me. What are my options? Some of the government agencies- think of it like HHS Health and Human Services, they have their own audit staff and they will sometimes send their own audit staff out to do that survey. And again, the same thing applies, they’re only providing a report back to the contracting officer. The other option is to have a third-party CPA come in and do this. This is an area that is still I would say relatively new to
government contracts. There are more agencies and offices utilizing this and open to this. They recognize that DCAA is backlogged and they’re not getting the work out of there that they would like. And so, you will see a number of these RFPS state that need to have an approved system and it could be from a prior government approval or it could be a recommendation letter from a CPA. So, you do have a few options.
[00:15:13] Mike LeJeune: A lot of good stuff there and it brought up a couple of questions for me. The first one is, does this happen with each contract? So, I get an audit every single contract or is it, hey I get a I get an audit on contract number one and that it’s good for two years I just show it next time I try to win a contract? Because I know the answers to some of these questions, but I think some of the people listening have them some trying to be their voice here because I think this is a complex area.
[00:15:42] Robert E. Jones: It’s a great question and it’s interesting because when you get an approval there’s no expiration date. So, some people might think it’s two years or three years and that’s not true. You can actually invalidate your approval the very next day. Because the survey is based upon the system that’s in place at the time they’re doing the survey. so, they’re looking at your policies, procedure, software, reports and saying okay, this contractor has everything in place that satisfies the requirements. If the very next day you take a portion of your policies and procedures and decide you’re no longer going to follow them, that has the potential to invalidate your group or that you just receive. And what I see happen is when I talk to clients they say oh I have an approval from five years ago or six years ago. And I started asking questions like have you replaced any personnel? Have you made any changes to your policies and procedures? have you updated any of your software? Have you introduced any new software such as maybe a new timekeeping system? Any of those things requires a new approval.
[00:16:54] Mike LeJeune: Wow that net really gets to my next question. I was actually going to ask was what all does the approval process involve because you just hit on a couple of things. Around like swapping out staff. Talk to me about the approval process and some of the things that you are surveyed on as you say.
Robert E. Jones: If you look at this list and walkthrough your policies and procedures: how do you handle travel expenses, how do you handle unallowable expenses? Are they appropriately segregated, do you have a policy that identifies uncompensated overtime -which is if you’re
salaried employees who are working more than 40 hours a week. So, you have a policy that addresses the key personnel, it is an interesting one because some people you know if you change a manager or a supervisor in a department, that can have a huge effect. The new person coming in may not realize the policies and procedures even though they’re written down. I think it’s safe to assume and admit really that we don’t always get out the policy procedure book every single day for everything that we do, right? We get comfortable with and feel like we know it and we keep doing it. Well what happens if somebody is out sick? What if somebody is out for an extended period of time? What if you lose somebody now somebody else comes in you hire a replacement for that position? They may not be as familiar with some of the nuances in your policies and procedures and may not be doing all of the things that need to be done. And so that’s why the key personnel question always comes up.
[00:18:41] Mike LeJeune: Yeah that’s a big one and you’re absolutely right and I always tell people especially, in sales, when it comes to policies and procedures, you’ve got to at least have a cheat sheet if you’re not going to crack the book open to look at it. Yeah, I have a cheat sheet on my desk for a lot of things like that because you will forget steps. You will get policies you will forget procedures. I always tell you will forget your name your phone number you’re at you will forget things like that from time to time. And it’s great to have a cheat sheet, at least as a guide, in a situation like this where it’s so critical. I can see you having ongoing training around it. You know there’s just a lot of different aspects of this. It’s something that sounds so easy to take care of. It just takes the time and the diligence to stay on top of it. So, the couple questions that I know people are wondering right now. First one is, how long does it take? Because I know people are thinking how long it takes to put together my policies and procedures and to make sure that the accounting system is done properly and train my folks and all that kind of stuff and then go through the audit process.
[00:19:50] Robert E. Jones: So, if it’s just a matter of valuing the policies and procedures, getting them tightened up, maybe you need to write some that you don’t have, doing that training and going through the audit, it’s certainly several weeks. I mean you’re probably -could be 12 to 16 weeks. The answer to this is it’s one of those it really depends. It depends on how much you already have in place as far as your policies and procedures how. How good are they? How much training have you already done with your employees? Obviously the more that’s done that it’s easier to go through this process. You know if you are a small company you’ve never had an approved system and you’ve never jumped through all these hoops before. I would say you’re looking at the high end of that and again possibly even longer.
[00:20:45] Mike LeJeune: Wow, that can be a long time in. And again, it’s one of those things you don’t want to start because there’s an RFP we want to bid on because this is going to be outside that time. Getting it started way ahead of time is a really good idea. So how much does it cost and maybe what costs are involved in getting in a free system?
[00:21:07] Robert E. Jones: So again, the cost area is another one as I say it really depends. There are a number of factors that go into it. There are software solutions on the market that range from a few thousand dollars for and investment to well over 100 or 200 thousand dollars if you’re a larger organization, very complex multiple sites, you’re probably on the high end of that scale. If you’re a service provider only and you have one location and maybe a dozen or 20 employees you’re obviously on the lower end of that scale. If you do manufacturing, that makes a system very complex you’ve got to have a software that can handle that. And that alone is going to drive up your software expense. But there are there are five main buckets of cost to consider. One is the software license, and that’s your basic fee out of the box to get the software and get it installed or get it hosted, your annual maintenance, and you will definitely want to have a maintenance plan because you want to get any patches that come along. Software companies, depending on who you go with, they do things a little bit differently. But at the very least again you want the patches some software companies offer enhancements and new functionality new features with some of those updates. you might want to be part of that, but also that maintenance usually includes phone support. Sometimes it’s a separate fee. You want to make sure that you’ve got somebody that you can reach out to. Say get a new contract type. Maybe you’ve been doing T & M for a while and fixed price and now you’re getting ready to do a cost reimbursable even though the system is capable of handling cost reimbursable, this might be your first time through and you need somebody to help with making sure you get the fields and everything set up appropriately.
[00:23:16] Mike LeJeune: You mentioned something there that was, I thought was really important, for the bigger companies that were listening. Or maybe midsize let’s say you’re a 100-million-dollar company and your mostly commercial. You’re now dabbling in the government space you’ve got several divisions of what you do. Your government space is only you’re only projecting three to five maybe 3 million dollars in revenue out of that. Do I still need to put this accounting system across my whole enterprise or can I segregate it down to my government division? because I’ve got to assume if I’m going to go enterprise wide and I’ve got products and services and all kind of complexities it’s going to be much more expensive to go enterprise wide vs. focused in on my government division. Can you segregate it like that or if you’re in you’re in it needs to be companywide?
[00:24:08] Robert E. Jones: I think with the scenario that you just presented, and I come across this at times, the companies that have a relatively small amount, which would kind of to me signal a couple of things. It’s very likely that they have just fixed price contracts. They’re not on the radar for T&M or cost reimbursable and they don’t have to have an approved system. There are certainly some things they should still be doing from an accounting standpoint. But they probably you know in reality in that scenario they probably don’t need a fully approved system. Now the second part of your question is, do I have to implement it across the board? And the answer is no. there are plenty of medium to large companies who do have different divisions. They performed, and they have some divisions or services that the government doesn’t purchase. So as long as they can clearly segregate that in their functions and in their inventory or whatever what the resources that are being employed to service those government contracts, if those can be clearly segregated, yes you can create a separate accounting system just to handle those costs.
[00:25:22] Mike LeJeune: You know I think that’s one of the game changers that I’ll take away from this podcast today. Because I think a lot of people get into this with misinformation or a lack of knowledge and they do a google search and somebody is going to go to their boss with their head hanging low and say we got to do this enterprise wide. And it’s just a google search that just makes somebody go and start reviewing hundred thousand-dollar systems instead of five or ten thousand-dollar systems. And once you pull the trigger and made that mistake you can’t get the money back. So, I think it’s a very important point that you nail there around you can segregate the business divisions and do this properly. So, as we’re starting to run low on time here I want to give you a chance to talk about two things: one your advice on avoiding some of the common pitfalls in making this less painful and then just any final thoughts you have for our listeners.
[00:26:21] Robert E. Jones: I think the pitfalls – One of them you just mentioned is that the Internet is a great resource. There is a lot of information out there. I would say don’t rely on any specific movie one particular Web site you know do your research. And I think if you begin to query some different sites you’re hopefully get enough information
that you can separate it. Reach out to a professional, whether it’s somebody like me, maybe a CPA, or somebody that you’re already using. I hate to say that it depends, but it really does, every business is so unique in the type of products or services that they do that mixture, the amount, the size and types of contract. There are so many factors that go into making these decisions. I can’t sit here on our podcast and tell you know you meet these criteria you absolutely to meet those criteria, you absolutely have to do that a lot of times there’s a lot of gray area and it’s kind of sorting through that and making the best decision you can make.
[00:27:26] Mike LeJeune: I think that’s really good advice and you know the one thing there the one caveat add on the CPA side is, I wouldn’t just call my local small-town CPA that just does tax returns on this. That guy probably doesn’t get it. I would maybe ask them, “Are you involved with government contracts? Do you understand DCAA? Do you understand what’s going on with a lot of this stuff?” If they don’t, you need to move on. You need to get a recommendation from somebody else. You need to call Robert and say Robert you know here’s the situation. What do I do.? And I think even if you spend a little bit of cash on just some advice and decide to go on your own. It’s so much smarter to call an expert like Robert right out of the gate and get that information because it could save you tens of thousands of dollars. And more importantly, win you contracts. because that’s really that’s why we’re talking about this. we’re not talking about this so you can get educated on accounting systems. We’re talking about this so you can win more contracts and be properly awarded stuff that you deserve. If you’re listening to this today and you don’t know about this subject and this is something that you know you’re going to have to go through or you foresee it, pick up the phone get, on the website, reach out to Robert. Ask him to get on the phone with you and walk through this. He makes a big point. People do not invest enough in the experts up front. And again, this is not like just calling any old accountant in the phone book. This is very specialized, and you need somebody with the special knowledge. So, Robert, I thank you for coming on today. You’ve given us a lot of wisdom about this. You’ve educated me on different aspects of it and I hope you’ve educated the listeners here. I think it’s been really good and I appreciate it.
[00:29:32-4] Robert E. Jones: Thank you. It’s been a pleasure.
Mike LeJeune: And I want to have you on again sometime and maybe just talk DCAA because we actually have a client that just reached out to us about and they were going through it, they are almost done with it. But it’s an intimidating subject. I think there’s a lot of ground we can cover specifically back in that. thank you again. I also want to thank all of our listeners for joining us today on this episode. remember you can find every episode on items. just look for game changers for government contractors and subscribe to the feed to make sure you get every episode. You can also learn more about each of our guests by visiting the official game changers website at arsonfederal.com/gamechangers where we will have links to their bios, episodes and contact information, things like that if you want to call Robert, all of his contact information is linked there, all of that will be on there. Last but not least, please visit our sponsor for today’s episode, the federal access program at rsmfederal.com/fa for more information about how you can find and win more government contracts.
Game Changers Outro: Thanks for listening to game changers for government contractors for full other episodes and other resources, be
sure to check us out on the web at www.rsmfederal.com/gamechangers