A recent DoW study reveals surprising truths about the federal contracting accounting space. Here, we delve into that study and the good news for small businesses.
The fear of complex government accounting rules is real. While the upswing of federal contracting is exciting, accounting holds many businesses back. Concerns about Cost Accounting Standards (CAS) and maintaining a “government-compliant” accounting system can be insurmountable barriers to some, stalling progress in crucial tech arenas.
But what if that fear is based on misconception?
A 2023 Defense Contract Finance Study reveals several surprising and encouraging facts. The truth is, these advanced accounting requirements apply to a much smaller fraction of the Defense Industrial Base than most people believe. In this guide, we’ll break down some myths and look at the real numbers. We hope this data gives you the same sense of clarity and opportunity that it’s given us.
Myth #1: Every DoW Contractor Needs to be CAS Compliant
The Reality: Only 2.2% of Department of War (DoW) contractors are subject to Cost Accounting Standards.
Many regard Cost Accounting Standards (CAS) as the most complex set of rules, but the DoW’s own data shows they are far from universal.
Who is exempt? The good news is that CAS does not apply to small businesses or contracts for commercial items. If you’re a small business or you sell a commercial product or service, you will likely never have to worry about CAS compliance, regardless of the contract’s value.
What this means for you: This single fact opens the door for a vast number of companies. The most intimidating accounting standard applies to a very small, specific subset of large, traditional contractors. (Often called “primes.”) You can focus on your technology and growth without regulations that don’t even apply to your business bogging you down.
Myth #2: You Need a Special “Government-Compliant” Accounting System to Get A Contract
The Reality: Just 12.34% of DoW prime contractors were required to have a government-compliant accounting system.
While more common than CAS, the requirement for a fully audited, government-compliant accounting system is still the exception, not the rule. Nearly 88% of companies doing business with the DoD do not need one.
When does it apply? This requirement typically kicks in for specific contract types where the government pays based on your actual costs, such as cost-reimbursable or time & materials contracts. The government needs to ensure businesses spend taxpayer money responsibly, so it requires a system that can accurately track and allocate those costs.
What this means for you: You can win and perform on many types of DoW contracts – especially fixed-price contracts – using standard, robust business accounting practices like GAAP. You don’t need to make a massive upfront investment in a new system just to get started.
Turning Requirements into an Advantage
Even for the small percentage of contracts where the government requires these systems, the study brings more good news:
- It’s an Allowable Cost: The costs associated with implementing and maintaining a compliant accounting system are typically allowable. This means you can recover your investment through your contract rates.
- It Unlocks Opportunity: Having a compliant system is not a barrier; it’s an investment that qualifies you for a wider range of high-value contract types, giving your business a significant competitive edge.
- You’re Not Alone: The Defense Contract Audit Agency (DCAA) provides numerous free resources, checklists, and even a small business focal point to help companies understand and meet the requirements. Plus, Vertx Partners is here to personally coach you through the DCAA’s rules of compliance!
The Vertx Takeaway
The perception of DoW accounting is often far more intimidating than the reality. The data is clear: the vast majority of companies can enter the defense industrial base without needing to meet the most complex and costly accounting standards.
The key is to understand which rules apply to your specific situation and to pursue opportunities that match your current capabilities. Don’t let accounting myths prevent you from bringing your innovative solutions to the government.
Feeling unsure about where your business fits in? Vertx Partners helps assess your specific needs, navigate the requirements, and build a strategic roadmap for growth in the federal marketplace. Contact us today!