How Factor AE Helps Firms Work Toward FAR Compliance
February 4, 2020
Government, in its many forms, is by far the largest client of the architecture/engineering (A/E) industry. From roads, bridges, and buildings to environmental projects, government entities provide more work for architects and engineers than all other sources combined. But, there are many rules for how firms must structure their contracts and interact with these entities. The rules are compiled in a set of what are called Federal Acquisition Regulations (FAR) — a book that’s feet thick and every bit as complicated as the tax code.
And it’s important to note that projects that are receiving any funds from the federal government are subject to FAR. In some cases, small municipalities don’t even think to disclose this because the funding seems inconsequential.
So, given that there is both tremendous opportunity and a fair amount of intimidation when it comes to working with the government, A/E firms tend to fall into two categories. Some fear the red tape and potential pitfalls, and consequently don’t pursue these projects. Unfortunately, they miss out on the chance to develop a steady stream of work that can help their firm grow in a very predictable way. Other firms throw caution to the wind, bid on and land work, then hope that they’re able to stay FAR-compliant with their QuickBooks system or other accounting solution. Neither of those approaches is a good one.
Enticement and Potential Penalties
Much of the work that government entities have for A/E firms falls under what are called “small business set aside” programs. These programs require that a firm with under $15 million in annual revenue must win the projects. This helps level the playing field in terms of marketing and gives small firms a chance to expand. But, many companies fall into the trap of getting this business and then not knowing how to handle the FAR requirements.
Other firms understand the hoops they’ll have to jump through but have an accounting system that isn’t FAR-compliant. This is a big problem, as FAR regulations allow auditors to go into firms and ensure they aren’t attributing costs to projects that are disallowed by rule. Penalties for intentionally breaking the rules can include fines and even jail time! And, more common than willfully breaking the rules is a situation where at the end of the year a firm distributes bonuses, only to get audited and find out that the government is requiring a refund and now there is no cash to pay it.
"Factor AE gives firms doing government work the tools they need to be FAR-compliant. When used properly, the system can minimize the risk of putting costs in the wrong accounts or the wrong format."
Factor AE and Guidance Toward FAR Compliance
Factor AE gives firms doing government work the tools they need to be FAR-compliant. When used properly, the system can minimize the risk of putting costs in the wrong accounts or the wrong format. This makes it easier to show auditors that the company is complying with government regulations and eliminates the fear of penalties.
The system does this in two ways:
● It guides the consistent allocation of labor as direct or indirect. While government regulations don’t specify how this must be done, the key is doing it the same way every time to allow auditors to understand your process. So, in Factor AE, if work is done on a project it is direct; if not, it is indirect and you will be cautioned not to enter it as direct. This best practice minimizes the risk of problems that can arise when using a system that allows a more free-form approach.
● It helps keep you from entering non-allowable overhead expenses. The government has a long list of things that are not billable. For example, general marketing expenses for items like maintaining your website, attending tradeshows, etc. are not billable. The reasoning is that because the government is very clear about what jobs are available, expenses not related to a specific job may not be billed. Factor AE has separate categories for different types of expenses (in this example, for general marketing and project-specific or “pursuit” marketing), which is essential since the primary focus of audits tends to be overhead.
We have found that if the system doesn’t provide beneficial boundaries, it’s very easy for firms to make mistakes they didn’t even know they were making. These built-in boundaries and general ledger accounts also help firms by encouraging them to make certain decisions about their processes and then train their staff about how Factor AE operates and why it works the way it does.
The end result of having FAR-compliant processes and software that enables easier adherence to the regulations is often significant savings due to avoiding refunds and penalties and to the elimination of time spent scrambling to understand and meet the requirements.
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