Blog | Insights

March 2021

Accounting.  That word can evoke strong reactions from small business owners and managers, especially in the highly regulated Government Contracting (GovCon) industry.  As the largest buyer of services and products in the world by a large margin, the United States Federal Government (Government) has implemented detailed accounting standards, policies, and regulations to protect the taxpayers who fund these purchases.  Every Government contractor is required by law to follow the relevant accounting requirements from day one of operations.  That means the managers of small- to mid-sized Government contractors need to ensure their accounting is fully compliant.  Outsourcing is one option available to achieve these goals.  So, why should outsourcing be considered?  Here are 5 benefits to gain:

1. Deep Experience with the Federal Acquisition Regulations (FAR), Cost Accounting Standards (CAS) and Government auditor guidelines such as the Defense Contract Audit Agency (DCAA).  The knowledge and experience of a company’s internal employees are limited to the knowledge and experience of those employees.  This is where many companies fall into the “that’s the way we’ve always done it” approach to accounting.  A contractor engaging an outsourcing company has access to the experience of all the accountants and financial professionals in the outsourcing company. In the GovCon world, this is critical for compliance.  For example, while an individual accountant working for a company may have gone through an accounting system audit, the combined experience of an outsourcing company is likely in the dozens to hundreds of audits.  That experience can make all the difference when it comes to compliance.

2. Access to a Department as Opposed to an Individual.  When a contractor hires an accountant, they are hiring an individual.  The level of expertise held by that individual will determine their cost in salary and benefits.  If the company wants a full department’s worth of expertise, from staff accountant to controller to finance director to CFO, they will need to hire a CFO.  If the company wants to cover the basics, they will hire a staff accountant and forgo the expertise of a controller, finance director, and CFO.  The problem is that a contractor needs all levels of expertise to be compliant with Government requirements.  Outsourcing companies provide a full range of resource levels in part- and/or full-time capacity as required to manage the contractor’s accounting.

3. Competitive Pricing.  Outsourcers are competitively priced when compared to internal hires. Outsourcing companies can implement the best accounting practices from across their customer base to maximize productivity, optimize accounting personnel by utilizing personnel on a fractional basis across customers, and gain economies of scale with software and tools.  In addition, contractors can (and should) get quotes from multiple outsourcing companies to ensure the quoted prices are reasonable.

Outsourcing does not, however, guarantee a lower cost to the contractor.  It is possible that a contractor can have a more productive internal accountant/system that has a lower cost than its peers. However, it is more likely that an internal accountant is not meeting all Government requirements, or the accounting system is not structured to assist in the growth of the contractor.  Although a contractor would have lower accounting costs, it is probable that the contractor will end up paying a much higher price in the future – from failing an audit, or losing contracts, or being unable to grow effectively.  If contractors calculate their internal costs on meeting all the accounting requirements and having the appropriate infrastructure in place, they will find an outsourced solution is very competitively priced.

4. Eliminate a Single Point of Failure.  Most employers have been in this situation – an employee leaves the company and the only option for replacement is a new hire.  This is especially true in administrative and back-office functions because they are usually thinly staffed.  Even if the company gets lucky and replaces that employee in a timely manner, there will always be a loss of institutional knowledge.  An outsourced solution brings the department approach (see Benefit 2 above) and thorough documentation and training.  In addition, if an employee leaves the outsourcing company another employee can be assigned immediately to eliminate any time without the resource.  An outsourced solution, when done properly, fully eliminates the single point of failure risk.

5. Provides Truly Scalable Accounting.  As a company grows rarely does its infrastructure and back-office grow in lockstep.  Companies often find themselves with over- or under-staffed accounting departments.  If a company waits until there is enough work for an additional full-time hire, they are chronically understaffed which negatively impacts accounting and finance operations.  If a company hires before there is enough work for an additional full-time hire, they are increasing costs and have unused capacity.  And there is another scalability issue – when the workload is not steady-state, but instead can increase and decrease dramatically period over period.  In this case, does the contractor staff for the peak, the floor, or the average? 

The outsourced solution, when tied to scale, can fully eliminate these scaling issues.  Because outsourcers can allocate accounting resources across companies, they can scale up and down for a particular company as needed.

While those are five benefits, there are also some important things to consider before committing to this outsourced accounting approach.  Keeping these 3 things in mind will make the difference in the speed and success of the arrangement:

1. Reduced Control of the Accounting. One of the primary reasons outsourcing accounting can be competitively priced is through standard, documented, and established policies and procedures.  This drives efficient productivity.  That means that the outsourcing company will drive the accounting schedule, data collection, and reporting.  Managers must fully consider this aspect of the solution, and that is not always easy to do.  

However, if the outsourcing is done correctly, managers will find a vastly improved process.  Effective outsourcing companies ensure managers can count on the defined financial deliverables schedule, receiving clear and valuable reporting, and, most importantly, knowing that the accounting is fully compliant. As the trust is built, managers can use the actionable information provided and the additional available time to focus on growing their business instead of managing accounting. When both entities work together embracing a true team approach, trust grows, and success ensues.

2. Hidden Costs.  A manager can task an employee with new or additional work at any time because they are an employee of the company. And if they are salaried, the cost likely is not increased by the tasking. With an outsourced accounting firm, new tasking will often create an additional cost.  Depending on the agreement with the outsourcing firm and depending on the complexity and duration of the task, it could be a significant additional cost.

Effective outsourcing firms provide an extremely clear and defined scope of work.  Not only that, but they also spend the time necessary in the discussions before signing an agreement to be certain the potential client understands exactly what is and what is not included in the scope.  A client should never be a surprised during performance that something is not in scope.  That is entirely the responsibility of the outsourcing firm to clearly communicate to the contractor. Make sure you are receiving effective communication and documentation up front from your outsourcing firm to eliminate issues or surprises.

3. Golden Handcuffs.  Depending on the outsourcing provider, a contractor could eventually feel “trapped” in the agreement, worried that changing providers or converting to an in-house solution would be disruptive at best.  This can happen with any agreement to outsource.  And it is a very legitimate concern.  Switching costs can be high, period.

However, this does not have to be the case.  The outsourcing agreement should not be longer than a year and allow for cancellation for failure to meet the terms.  The scope of work should include training and documentation which is owned by the contractor, not the outsourcing company.  Finally, the software and tools should be owned or transferrable directly to the contractor.   A good outsourcing company keeps its clients because they are adding value, not because of the high cost of switching.  If the agreement with your outsourced provider includes these protections, you are in good hands.

The McKelvey Group has been providing successful outsourced accounting solutions to Government contracting clients for over 25 years.  GovCon accounting is in our blood and has been since the founding of the company.  Our accounting professionals are experienced in all FAR, CAS, and DCAA requirements.  In fact, none of our outsourced accounting clients have ever failed a Government Accounting System Audit.

But that is not what makes us unique.  Our mission is to help our clients grow – period.  Yes, we have the deep technical experience to do the work.  Yes, we provide peace-of-mind by meeting all requirements and deadlines.  And yes, we provide actionable information instead of raw financial data.  But more importantly, we thrive on letting our clients focus their limited time on growth activities around business development and exceeding their customer expectations.  When you are not worried about that word – Accounting – and instead, you are focused on growing your business, that is when we consider ourselves successful.

Please contact us about our outsourced Government Accounting solutions.