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How to setup Items in GovBooks
Meets the following DCAA requirements: (see all requirements here)
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Requirement 2i: Identification of costs by contract line item and by units (as if each unit or line item were a separate contract) if required by the proposed contract.
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Requirement 4: Is the accounting system designed, and are the records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on acquisitions?
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Synopsis:
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In this article, I discuss the various ways to use items in GovBooks and QuickBooks Online. Items are used in QuickBooks Online to create line items on customer invoices, checks, expenses, and bills. Items are not available in journal entries in QuickBooks Online. On customer invoices, items are required to create an invoice. You can add as many items as you want to an invoice. Items also allow you to identify unbilled time and expenses and automatically insert them onto an invoice.
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Items allow you to track the amount billed, by item, with the cost for that item. This is a DCAA requirement, which requires that you can provide cost data, by unit, for each item that is billed. When you record your invoices, you'll select the appropriate Items. When your record your costs, you'll select the Item that you will use when billing. This is especially important for Cost Plus-type reimbursable contracts or line items, because you are only able to bill actual cost that are incurred. In addition, items are used for the indirect rate application on invoices.
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If you need help with setting up items in QuickBooks Online or GovBooks, I would be glad to assist you through my online Help Desk.
What is an Item?
The use of items in QuickBooks Online is a powerful way to manage contracts and projects by creating a relationship between the revenue generated by the item and the cost inputs to produce the item. The difference between the item's revenue and the item's cost is the item's profit.
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We can easily understand the profit of a project. It is simply all the revenue generated by a project after subtracting all the costs associated with the project. Each project, however, can be broken down into smaller pieces. For instance, let's imagine a project to build a computer system. The hardware for the computer system is composed of many individual parts. Each part can be assigned an item in QuickBooks Online and the cost of each item can be tracked. The direct material cost of the computer system is simply the cost of each item added together.
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But what about the labor costs to build the computer system? Items in QuickBooks can also be used to track wages paid to the workers who assemble the computer. The direct labor cost of a the computer system is simply the cost of each hour added together. Different types of labor (labor categories) with different labor costs can be assigned to their own item.
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A computer system is a good example because it may be custom-built, to different and exacting specifications, which may vary according to its end use. The customization required for one computer may require a different combination of hardware components and types and quantity of labor than another customized computer. By breaking down the costs into labor and material items, a government contractor can accurately estimate the cost to build a custom computer by adding the item costs of each component, both material and labor.
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QuickBooks Online can go one step further. Each item can also be assigned a sales price. Here's an example. Spare parts for the computer will eventually be needed to make repairs. The government will need to purchase spare parts from the government contractor, but at what price? It's not likely that a spare part can be purchased at the computer store. In fact, there may only be one supplier, the government contractor who originally built the customized computer. How is the price for the spare part determined?
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The spare part is an item in QuickBooks Online and its cost can be determined because the part was used to build the original computer. The government contractor can determine the actual cost of the spare part, to include both materials and labor, add to it a mark up to cover indirect expenses such as factory overhead, and add a fee to make a reasonable profit.
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This level of detailed job costing is often required in government contracting because the items purchased by the government may be custom-made and usually cannot be purchase off-the-self from a commercial vendor. During contract negotiations, the government will often require a complete break down and disclosure of all labor and material costs, to ensure that the cost is reasonable, both for the product being delivered, and for its associated spare parts.
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The same logic applies for service contracts that deliver primarily labor. The cost of labor will often be examined by reviewing the components of wages, fringe benefits, overhead, and a fee, for each labor category being purchased, all of which can be tracked in QuickBooks Online by the use of items.
Types of Items
Four types of items are available in the Products and Services screen:
1. Inventory Items
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Inventory items are products a business sells and wants to track the quantity of. Typically, a business creates or buys these items, holds them “in stock,” and then sells them to customers. QuickBooks tracks inventory so users can quickly check the quantity on hand, the cost of goods sold, and the inventory’s total value.
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2. Non-inventory Items
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Non-inventory items are products a business sells, but doesn’t track the quantity of. In general, businesses don’t need to track quantities for non-inventory items. For example, office supplies and materials for making products. Non-inventory items may be materials used for a specific job, or their cost is combined with other fees.
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3. Services Items
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Service items are for tracking services a business provides to customers. For example, labor, consulting hours, and professional fees. On cost-type contracts, service items are also used to bill indirect and fee rates, such as fringe, overhead, and g&a.
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4. Bundles
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Bundles (also known as “groups”), represent a unique group of items bundled together. For example, you can set up a bundle with 5 apples, 5 oranges, and 5 pineapples and call it a “fruit basket” bundle. The bundle becomes a single item that contains other items. Bundles can’t contain other bundles. Bundles can’t contain categories. An item can be listed more than once with same or different quantities. Bundles can be added to transactions.
How to Use Items in Government Contracting
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QuickBooks Online gives you a lot of flexibility in how you design your projects. Items are an important aspect of this design process. Items can be associated with revenue and cost accounts and can be associated with each other in a parent-child hierarchy (up to 5 levels). Unfortunately, I find that items are not fully utilized by many government contractors. If you want to optimize your use of QuickBooks Online, I would be glad to assist you with a Help Desk session.
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CLINs
CLINs, or contract line item numbers, are often found in government contracts, and if present, then you are obligated to track billings, funding and cost by CLIN. This can be done with a sub-customer or project in QuickBooks Online, which is the usual method. However, because QuickBooks Online is limited to 5 levels of customer/sub-customer/projects, you may need to extend this capability by using items to track CLINs. This works fine because you will also be able to run profit and loss report by items, meeting one of the DCAA requirements.
With GovBooks, you are not limited to 5 levels of customer/sub-customer/projects, because GovBooks allows you to select and combine any number of customer/sub-customer/projects. GovBooks also has a CLIN setup screen that allows you associate multiple customer/sub-customer/projects and multiple items with a CLIN in GovBooks, and establish parent-child relationships, providing almost unlimited project design capabilities.
Labor Categories
Things can quickly get messy if you try to use sub-customers/projects in QuickBooks Online to track labor categories. Items are perfectly designed to be used as labor categories and can be organized in a hierarchy of up to 5 levels. For those contracts that require named personnel to perform the work, you can even track the person's hours, labor costs and billings by the person's name, using an item. An added bonus is that many online timekeeping systems allow you to connect a person's time charges to QuickBooks Online by mapping to the item.
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Products and Services
If your contract is providing a named service, or you are delivery a product, and you want clarity on your financial reports and customer invoices, consider using an item to capture this information, rather than a sub-customer/project. The services you provide may not be a formal CLIN but you or your customer may still want to track it as a separate category. An example of a service might be "IT Services" or "Help Desk Services". Products are things that you sell, like a spare part in the example above for an armored personnel carrier, or even the carrier itself can be assigned an item in QuickBooks Online.
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Phases, Milestones and Sub-projects
Sub-customers/projects in QuickBooks Online can be used for phases, milestones and sub-projects, but with only 5 levels available in the hierarchy, typically two of those levels are taken by customer and contract, leaving only 3 available. To extend your tracking and billing capability in QuickBooks Online, make use of items for phases, milestones and sub-projects, which can be associated in a hierarchy of 5 items if needed.
Funding Periods
Government contracts can be funded over a period of time. In some cases, the funding will be limited by a time period and can only be used within the stated time period. Any unused portion from one time period would not carry forward to be used during the next time period. This is typically known as incremental funding, in which case you will need to track these discrete fundings in QuickBooks Online. It is possible to use a sub-customer but you also have the option to use an item.
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Indirect Rates
If you have a cost-plus reimbursable type contract or line item on your contract, you will need to include your provisional billing rates on your invoices to the government. You will also need to track the actual cost of the indirect rates that you billed, which will be different than the provisional rates that you bill. Provisional rates are estimated rates for your fiscal year and need to be trued up to actual rates after your fiscal year ends, at which time you close your books for the year compute your actual rates. If you overbilled, you owe funds back to the government. If you underbilled, they owe more funds to you, if your funding limits allow. Items can be used to accomplish this in QuickBooks Online. Typically, you would set up an item for fringe, overhead, g&a and fee, depending on your indirect rate structure.
GovBooks provides an indirect rate module that computes your actual indirect rates. GovBooks also provides extensive reporting capabilities to help create cost-plus invoices with indirect rates.
