A recurring problem in Government Contracting is that contractors may select from alternative accounting methods without specified criteria governing such selection. Contractors sometimes present cost data in pricing proposals differently from the way they record their cost of performance.
This is a very important point. This creates difficulties in administration. An example is the difficulty concerning verification of supporting cost data in proposals submitted by contractors in compliance with Public Law 87-653, which has come to be known as the Truth-in-Negotiations Act of 1962…
When a cost applies to more than one objective, the relationship to any one of the objectives is considered to be indirect. Indirect costs, in the aggregate represents the largest single class of expense incurred under Government contracts.
That was former Comptroller General Elmer Staats in the 1970 hearings on the Cost Accounting Standards Board. The problem of consistency between proposing, collecting, and reporting costs still exists today. It isn’t so easily reconcilable as Staats makes it appear (I think he understood that, however).
The government often demands cost proposals to be broken out not just by cost center and object of payment, such as grades of labor and material types. The government also wants costs according to a Work Breakdown Structure that is output oriented. Costs should be assigned to a hierarchical structure down to switchboards and actuators. This requirement explodes contractor accounting systems. It often results in a geometric increase in the number of cost accounts that need to be managed by the contractor.
More often than not, and especially on lower value efforts, contractors will have rules for allocating (rather than discretely collecting) costs to the output-oriented WBS. Regulations are pretty not well understood on this front, but below Contract WBS level 3, the contractor can define its own structure (or end the accounting there if it chooses).
It was believed during the 1960s/70s that the rise of computer technology would make such cost accounting easier. The same thing was said in the 1990s with the rise of modern enterprise resource planning (ERP) tools. This has made it easier for firms to assign direct costs to all manner of objectives. But Staats brings up another issue.
Indirect costs have been growing, and indeed have become even more important since the 1970s. Less effort is in routine labor, raw materials, and physical capital. More effort goes to non-routine work that supports several objectives, and indeed, this is what has made firms more productive. Intangible assets like software, databases, patents, brands, culture, context-specific training, and so forth, is what makes firms in the 21st century innovative.
Yet prime defense contractors look rather a lot like industrial era firms due to government incentives To a degree, they spend a great deal of money having labor and capital that used to be classified as indirect now charge to direct — at the government’s expense. This papers over the fact that much of the work is in fact fixed and up front rather than recurring like on an assembly line.
Source: Extension of the Defense Production Act and Uniformed Cost Accounting Standards. Hearings Before the Subcommittee on Production and Stabilization of the Committee on Banking and Currency, United States Senate, Ninety-First Congress, Second Session, on S. 3302, A Bill to Amend the Defense Production Act of 1950, and for Other Purposes. March 31 and April 1 and 2, 1970.
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