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How to setup Contracts, Grants and Projects in GovBooks
Meets the following DCAA requirements: (see all requirements here)
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Requirement 2b: Identification and accumulation of direct costs by contract
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Requirement 2j: Segregation of preproduction costs from production costs
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Synopsis:
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In this article, the standard setup of customers and projects is discussed and a sample setup is created for the most common types of federal contracts. I discuss the definition of direct versus indirect costs with examples relevant to your business. Billing levels are examined and their relationship to contract funding, extensions, option years and modifications. Contract briefs are discussed and an excel template is provided.
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If you need help with setting up your contracts and projects in QuickBooks Online or GovBooks, I would be glad to assist you through my online Help Desk.
Definition of Direct versus Indirect Costs
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It is important to understand the concept of direct and indirect costs so that you may properly code transactions in your accounting system. Failure to properly segregate your costs between direct and indirect costs will cause you to fail a DCAA audit. Contract Setup deals with direct costs only. How to set up indirect costs are explained in Step 7 - Indirect Rate Calculation.
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Direct Costs:
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Direct costs are costs that can be identified to a single contract, regardless of whether the cost is billable or not. The most important concept here is that your contract costs include both direct costs and indirect costs, but each type of cost must be handled in a different manner.
This 2nd Step, Contract Setup, deals with direct costs only.
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Indirect Costs:
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Indirect costs are costs that cannot be identified to a single contract, and are therefore pooled together and then allocated in some manner to contracts which should be in relationship to the benefits received by each contract.
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Indirect costs are normally divided into three categories, although there may be more.
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Fringe costs consist of employee benefit insurance, payroll taxes, paid leave and other employee benefit programs.
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Overhead consist of shared contract expense which is shared among two or more contracts.
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G&A expense consists of general and administrative expense incurred to manage and operate the company as whole and is not related to contract performance.
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I have developed a guide, the "DCAA Transaction Coding Guidance", to assist you with these definitions, and can be downloaded from File Downloads.
Basic Contract Setup:
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There are 3 steps that must be completed for each contract setup:
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Customer Setup
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Contract and Project Setup
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Item Setup
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There are many different types of government contracts, and the best contract setup will differ for each type. I will provide examples below of the following types of contracts:
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Single Funding Period and Single Project
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Single Funding Period and Multiple Projects
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Multiple Funding Periods and Single Project
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Multiple Funding Periods and Multiple Projects
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Multiple Task Orders and Multiple Projects
If you need any assistance with your Contract Setup, I can help you through my Help Desk.
​Step 1: Customer Setup
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Your first step in QuickBooks Online is to set up a Customer. Contracts and projects are then created and assigned to Customers. Open the Customer screen in QuickBooks Online and click on "New customer".
Next, fill in your customer information and click "Save".
Step 2: Contract and Project Setup
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QuickBooks Online does not have a contracts module, so instead we use a sub-customer that is attached to the customer. To create a sub-customer, start by creating a customer like you did in Step 1, except this time you will give the customer a name that designates the contract. I recommend using the contract number if available since your DCAA auditor will use this to map your accounting system to your contract documents. Or, you can use any name you would like. It does not need to be a unique name. Then, check the box "Is a sub-customer" and select the parent customer (the customer that this contract is assigned to). Note that if you have multiple contracts from the same customer, you should use the same customer as the parent customer. Finally, most government contracts are billed at the contract level, not the customer level, so you should uncheck "Bill parent customer" which will prevent billings from more than one contract to be rolled up to the customer level. Keep this feature in mind. It's a handy way to roll up invoices to a higher level and gives you flexibility in how you design your contract setup.
Single Funding Period and Single Project
1. Customer (customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
2. Contract (sub-customer or project)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
If your contract will not have multiple funding periods (such as Base Year, Option Year One, etc.) and you only need to collect costs at one level for a single project, you will only need 2 levels. If you are using QuickBooks Online Plus or Advanced, you can use Project as the lowest level, but it is not required. When you are finished, click "Save".
Single Funding Period and Multiple Projects
1. Customer (customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
2. Contract (sub-customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
2. Project (sub-customer or project)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
If your contract will not have multiple funding periods (such as Base Year, Option Year One, etc.), but you need to collect costs for a contract in more than one project, you will need 3 levels. The project level should be a sub-customer of the Contract. Contracts with multiple projects are typically billed at the contract level, so check the box for "Bill parent customer" to bill at the contract level. If you want to create invoices for each project, uncheck this box. If you are using QuickBooks Online Plus or Advanced, you can use Project as the lowest level, but it is not required. When you are finished, click "Save".
Multiple Funding Periods and Single Project
1. Customer (customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
2. Contract (sub-customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
3. Funding Period (sub-customer or project)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
Longer-term government contracts typically are funded over time during discreet funding periods. In this case, unused funding from one period would not carry over to the next period. Therefore, funding needs to be segregated within the accounting system and tracked separately. To achieve this, you would set up a 3rd level, the Funding Period level and make it a sub-customer of the contract. Multiple funding periods can then be set up and associated with the same contract. If you only have a single project, you can collect costs at the Funding Period level. Contracts with funding periods are typically billed at the funding period level, so leave the "Bill parent customer" checkbox unchecked. If you are using QuickBooks Online Plus or Advanced, you can use Project as the lowest level, but it is not required. When you are finished, click "Save".
Multiple Funding Periods and Multiple Projects
1. Customer (customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
2. Contract (sub-customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
3. Funding Period (sub-customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
4. Project (sub-customer or project)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
You may need to segregate your costs into separate projects and also track funding periods.To achieve this, you would set up a 4th level, the project level and make it a sub-customer of the funding period sub-customer. Multiple projects can then be set up and associated with different funding periods. If you only have a single project, you can collect costs at the Funding Period level. Contracts with multiple projects and funding periods are typically billed at the funding period level, so check the "Bill parent customer" checkbox. If you are using QuickBooks Online Plus or Advanced, you can use Project as the lowest level, but it is not required. When you are finished, click "Save".
Multiple Task Orders and Multiple Projects
1. Customer (customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
2. Contract (sub-customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
3. Task Order (sub-customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
4. Project (sub-customer)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
5. Project (sub-customer or project)
I'm a paragraph. Click here to add your own text and edit me. It's easy.
Projects are the lowest level on a hierarchy of parent-child associations, starting with customer at the top, then contract, and then project. QuickBooks Online allows for up to 5 levels in the hierarchy. Since 3 are used for customer, contract and project, this leaves you with 2 additional levels that you can use for additional project levels. The Simple Start and Essentials version of QuickBooks Online do not have projects, but don't worry if you have these versions. You will simply use a sub-customer for a project. (If you need guidance on which version of QuickBooks Online to use, see my article here.) All versions of QuickBooks Online allow for 5 levels in the hierarchy whether it be a customer, sub-customer or project.
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The 5 level limitation in the hierarchy is normally not a problem for most contract setups. You can associate more than one project to a contract or intermediary sub-customer without limitation. You can overcome these limitations with GovBooks, which allows for any number of levels if your contracts are more complex (which happens with work breakdown structures and tasks).
You may need to set up a task order contract, for which each task order typically has one funding period, but the task order itself may have multiple projects or even sub-projects that roll up to a higher project level. To achieve this, you would set up a 3rd level for the task order, and the project and sub-projects at lower levels. Multiple projects can be set up and associated with different task orders. A task order contract is typically billed at the task order. If you are using QuickBooks Online Plus or Advanced, you can use Project as the lowest level, but it is not required. When you are finished, click "Save".
