Compliance as a Growth Driver: Accounting for Commercial and Government Funded Contracts

By Jennifer Eubanks | August 16, 2024 |

Many research and development heavy companies pursue groundbreaking research and develop products aimed at improving various aspects of life. These companies’ missions are not only to advance science and technology but also to secure funding from both private and federal sources to fuel ambitious projects.

As these companies embark on this journey, they face critical accounting requirements to ensure compliance with Generally Accepted Accounting Principles (GAAP), IRS regulations, and specific guidelines related to federal funding. Here we outline the key accounting considerations and compliance requirements that such companies must navigate to successfully manage and report their finances.

Understanding Federal Funding Compliance

Receiving funding from federal sources typically necessitates adherence to the Code of Federal Regulations (CFR), Title 2, or the Federal Acquisition Regulations (FAR).

Companies exploring the option of securing federal funding through Other Transaction Agreements (OTAs) will find that, unlike traditional federal contracts, cooperative agreements, or grants, OTAs offer more flexibility and are not subject to many of the stringent compliance requirements associated with FAR-based funding structures. This flexibility allows companies to use a commercial accounting system, which is less burdensome than maintaining a system structured to comply with FAR, Cost Accounting Standards (CAS), and CFR requirements.

Why Compliance Matters

Compliance with federal regulations is crucial for several reasons.

Firstly, it ensures that companies can continue to receive federal funding without interruptions. Non-compliance could result in penalties, funding withdrawals, or disqualification from future funding opportunities.
Secondly, maintaining compliance builds trust with investors and stakeholders, showcasing the company’s commitment to ethical and transparent financial practices.
Lastly, a robust compliance framework enhances operational efficiency by ensuring that all financial activities are conducted within established legal and regulatory parameters.

Federal Funding Mechanisms: Grants, Cooperative Agreements, and Contracts

When receiving federal funds, businesses generally do so through one of three mechanisms:

Federal Grants
Cooperative Agreements
Contract Awards

Increasingly, federal awards are being issued using OTAs, which provide a streamlined and flexible approach to funding research and innovation. Below, we explore the accounting requirements for each funding mechanism.

Accounting for Federal Grants

Federal grants are governed by the Code of Federal Regulations, Title 2, Subpart E, which outlines the general criteria for allowable costs under federal awards. Key requirements include:

Necessity and Reasonableness: Costs must be necessary and reasonable for the performance of the federal award and allocable to the project.
Conformity to Limitations: Costs must conform to any limitations set forth in the grant award or governing principles.
Consistency: Costs must be consistent with policies and procedures that apply uniformly to both federally financed and other activities.
Consistent Treatment: Direct and indirect costs must be treated consistently across similar circumstances.
GAAP Compliance: Costs must be determined in accordance with GAAP.
Documentation: Costs must be adequately documented and incurred during the approved budget period.

While federal grants are not subject to FAR, they can be subject to CAS if the recipient is required to adhere to these standards. Ensuring compliance with these detailed requirements is essential for maintaining grant funding and avoiding financial discrepancies.

Accounting for Cooperative Agreements

A cooperative agreement is a hybrid funding mechanism that combines elements of both grants and federal contracts. Governed by the Federal Grant and Cooperative Agreement Act of 1977, cooperative agreements involve substantial involvement by the federal agency and are designed to provide assistance rather than acquire services.

The accounting requirements for cooperative agreements are similar to those for federal grants, as outlined in CFR Title 2.

Accounting for Federal Contract Awards

Federal contracts are governed by FAR Part 31, which mandates that contractors account for direct, indirect, and unallowable costs by contract award. Contractors that meet certain size requirements are also subject to CAS, as detailed in 48 CFR Chapter 99 and FAR Part 30.

Compliance with these regulations ensures that all costs are accurately allocated and reported, facilitating transparent and accountable financial management.

Accounting for Other Transaction Agreements (OTAs)

OTAs represent a non-traditional method of government funding aimed at expediting research and prototype development. OTAs can be used for research projects, prototype development, and production follow-ups.

Unlike traditional funding mechanisms, OTAs allow agencies to bypass many of the stringent requirements associated with FAR, CAS, and competition requirements. This flexibility makes OTAs particularly attractive for innovative projects, as they can speed up the acquisition process and reduce the administrative burden on recipients.

Accounting for OTAs is like accounting for commercial organizations, making compliance far less complex. This streamlined approach allows companies to focus more on their core research activities and less on navigating intricate regulatory requirements.

Strategic Considerations for Future Compliance

While the current focus on OTAs provides a simplified compliance framework, companies should consider the potential need for future funding through federal grants, cooperative agreements, or contracts. Establishing an accounting system capable of complying with these federal funding mechanisms now is a prudent strategy.

Implementing a compliant system from the outset will make it easier to transition to more complex funding structures in the future, avoiding the substantial effort required to convert a commercial accounting system to one that meets federal regulations.

Compliance as a Growth Driver

Companies poised to make significant contributions to various fields must master a complex landscape of accounting requirements and compliance standards. By understanding and adhering to the specific guidelines associated with federal grants, cooperative agreements, contract awards, and OTAs, these companies can secure the funding needed to advance their research while maintaining the trust of investors and stakeholders.

Establishing a robust and compliant accounting framework today will pave the way for sustainable growth and success in the future.

Professional Assistance and Training

Using compliance to drive business growth requires specialized knowledge and expertise. Contact us if you have questions or need training for your employees regarding requirements. We are ready to guide you through this intricate process to make compliance manageable for your organization.

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