ERP considerations in government contracting

Beyond the software

Oct 13, 2014

Doing business with the federal government is complex and guided by its own set of regulations and standards across a multitude of scenarios. The documentation, compliance and audit requirements for a government contractor are significantly more intricate than that of a traditional commercial company. As a result, government contractors are required to dedicate more time to managing the unique challenges and complexities associated with government procurement. Staying on top of these ever-evolving regulations and remaining compliant can be daunting. While an enterprise resource planning (ERP) system is key to managing compliance, the system alone will not do. A comprehensive system involving technology, people and processes that supports operations and regulatory challenges is absolutely necessary.

Defining an ERP system

There are a myriad of definitions related to ERP. PC Magazine defines it as “…an integrated information system that serves all departments within an enterprise. Evolving out of the manufacturing industry, ERP implies the use of packaged software rather than proprietary software written by or for one customer. ERP modules may interface with an organization's own software with varying degrees of effort, and, depending on the software, ERP modules may be alterable via the vendor's proprietary tools, as well as proprietary or standard programming languages. An ERP system can include software for manufacturing, order entry, accounts receivable and payable, general ledger, purchasing, warehousing, transportation and human resources.”

Important conclusions can be made by analyzing the above definition. For instance, the system must span across the enterprise. It must encompass all or the majority of the systems a company has implemented. In addition, in most cases, a number of processes, policies and procedures are needed to identify data entry responsibility, how data integrity is maintained and how controls are established and operated to ensure accuracy, reliability, timeliness, completeness and availability of the data.

Beyond the software

System, as defined in regulatory documents, consists of software, processes, policies and controls. This is supported by the existing regulatory documents applicable to government contracting. Most pronounced in this regard is the definition in the Defense Federal Acquisition Regulation Supplement (DFARS). It states, definition of system (Department of Defense acquisition regulations, 252.242-7006  Accounting System Administration) is defined as “an accounting system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions, and may include subsystems for specific areas such as indirect and other direct costs, compensation, billing, labor, and general information technology.”

Therefore, system is the software plus the people that operate it and the processes that have been employed to operate the software. This directly contradicts the understanding that software alone can secure compliance. In terms of government contracting, the applicable requirements are rooted in a large number of regulatory documents, including documentation in everything from Federal Acquisition Regulations to Cost Accounting Standards.

Another misunderstanding of the applicable requirements is related to the role of the Defense Contract Audit Agency (DCAA), which reviews or audits contractor systems, inclusive of the software, people and processes. DCAA provides guidance to its auditors and audit programs that are helpful in establishing an understanding of the requirements, but does not review or establish vendors’ systems compliance.

However, a number of vendors claim to provide accounting software that is compliant or meets either DCAA or other government requirements. This claim overemphasizes the importance of a stand-alone software product and overlooks the other system elements. This perception also suggests that software systems, other than the one specifically designed for the purpose, cannot be used by government contractors. Yet, in practice, contractors use a wide variety of software, depending on their size and industry, and have been able to customize a variety of software products to meet their needs and the requirements applicable to government contracts.

What are the potential consequences of noncompliance and an inferior ERP solution?

Dependent on the circumstances, the regulations impose a substantial number of administrative actions and civil and criminal penalties related to noncompliance. Generally speaking, the majority of noncompliance cases are related to material liabilities from a contractor’s perspective. This may include:

  • Inability to collect payments or delays in payments, usually related to billing systems, but in a number of cases having provenance in incompliant timekeeping, labor charging or other systems. These consequences have a direct effect on the contractor’s cash flows and cost of doing business, as they often drive the need for relatively expensive operating loans. Often, loan covenants and other binding agreements are dependent on these metrics.
  • Penalties, restitutions or interest, which can be related to any element of the system or contractor’s process, such as charging of unallowable costs, not paying timely or not applying credits that are applicable to the contract and price reductions. These may affect the ability to continue working for the government or win future business. These liabilities, in certain cases, have been established, even after testing in court, in millions of dollars.
  • Terminations, including the contracts with the federal government consisting of mandatory closes that allow the contracting officer to terminate a contract, both for default and for convenience, giving the government the option at its discretion to terminate practically every contract in case the contractor does not perform as expected, including if its financial, accounting and other business systems are not compliant in relation to the requirements.
  • Loss of ability to propose on future work, which is a major concern for contractors, as it can cause a disruption in their strategy, loss of lucrative work and large clients and prevents the contractor from delivering on expected results with a variety of possible negative consequences depending on the company.

Having a wide-ranging ERP system will help avoid the above, as well as coordinate all the systems needed to address ever-evolving regulatory requirements and issues. Working with a professional who stays on top of these regulatory challenges and can offer guidance on a comprehensive ERP business solution that meets your unique needs is key.