Is it important to have an acceptable project accounting system if we only do firm fixed priced contracts?
We will ignore for the moment the question of why you would not want to understand your cost for purposes of value engineering or other cost reduction initiatives.
From a government contracting perspective, it is important to ensure your project cost accounting system accurately accumulates costs incurred. This is particularly important if you price contract effort based on historical cost data, are required to submit certified cost or pricing data, or request progress payments based on cost.
If cost or pricing data is required, the Truth in Negotiations Act (TINA) requires a contractor to show the cost incurred on similar projects. There is no requirement to estimate using the historical data, but relevant historical data must be disclosed to the customer. If the accounting system does not properly accumulate the cost, the data will not be accurate and, therefore, be in violation of TINA requirements.
So the short answer is “Yes” – you should ensure you have an acceptable project accounting system even if all you do is firm fixed price contracts.
Is the method I use to allocate indirect costs to contracts important?
Absolutely. The way indirect costs are allocated to contracts can have a tremendous impact on cost recovery and thus overall profitability. It is important that the composition of the allocation base be understood.
Should I understand the composition of my costs? Is it important to know what portion of my overhead is fixed and what is variable?
The fixed versus variable classification of cost is useful in some instances, but for most contractors all indirect costs are fixed over the relevant range. This is particularly true for larger contractors. Why is this important? This information can be very helpful. For example, if the contractor is negotiating a cost incentive type contract and knows that the fixed price component of overhead is $0.60 per direct labor dollar the customer can be told that the share ratio has to be greater than 60% before the contract is truly incentivized.
It can also come in handy when your marketing mavens want to bid at less than full absorption costing.