How much did that contract cost?

Pre-Award Accounting System Survey


3. Direct costs by contract.


Greetings and welcome back to my DCAA Blog.

We’ve been unpacking the audit program used by DCAA for Pre-Award Accounting System Surveys over the past few issues.

As you already know, the Pre-Award Survey is something that DCAA usually performs prior to the award of a contract to ensure that your accounting system can handle a government contract.

Today, let’s dive into Step 3 of that audit program, Direct Costs by Contract, which calls for the auditor to check your accounting system and verify that it can produce a subsidiary job cost ledger which accumulates costs by contract.

That was indeed a mouthful of words.

Some of the technical terms used in this step include; direct costs, job costing, and subsidiary ledger.

Allow me to provide a brief description on what those are.

First thing we should discuss is the concept of a job. In cost accounting, a job is a final object that can be identified separately from other work. More formally, the terminology used is Cost Object. For government contractors, a job is usually a contract, or a task order, or a grant. Such jobs are considered final cost objects because it is the end point where various expenses accumulate and don’t get further allocated to other jobs.

So, direct costs are those expenses that can be clearly tied to a particular job. For example, at a manufacturing firm, direct costs could be the salary of an employee who worked on a particular order. Direct costs can also include the cost of materials that went into working on that order.

Next is the ledger.

Within one’s accounting system, we find many accounts. Examples of those accounts include Cash, Revenue, Direct Labor, Direct Materials, Overhead, Fringe Benefits and such. Accounts are basically a collection of transactions of like kind that are grouped together. So, as you look into a particular account, you’d be able to see all the transactions that make up that account. A ledger is a collection of such accounts. Meaning, if you look into a ledger, you would see all the accounts that make up that ledger, and also, all the transactions that make up each account in that ledger. The ledger that has all the accounts within an accounting system, and all the transactions that make up each account, is known as the General Ledger.

When you make a ledger of not all but a choice of accounts, that ledger is known as a subsidiary ledger.

In this audit step, the auditor is required to verify that your accounting system can generate a subsidiary ledger that has all the accounts related to a particular job (contract). In other words, your system should be able to generate a report that shows which accounts are related to a contract, and also show every transaction that makes up each of those choice accounts. If you have multiple contracts, then this report would show the contracts next to each other. Using this report, you would be able to see how much of expenses you have for each contract.

Most advanced accounting systems have this capability and are found suitable for government contracts, with the drawback of having price tags that can prevent some small contractors to purchase.

For small contractors, often times the choice of accounting system is QuickBooks for it’s ease of use, reasonable capabilities, and price.

So, is it possible to produce a subsidiary job cost ledger which accumulates costs by contract using QuickBooks?

Yes, it can be done. It does require some initial setup work. For example, setting up the jobs (Contracts) as customers and sub customers, setting up the direct labor and materials as service items, and setting up accounts to be used for indirect cost allocations. But the point is that it can be done.

Do you have questions on how to setup QuickBooks to meet this steps requirement?

Please feel free to reach out to me directly by phone or email.

Thank you and see you next time!


Dan Kim, CPA