Government Contracts Accounting Issues

GOVERNMENT CONTRACTS 2

Communication of Cost Objectives

Communication of cost objectives to both internal and external stakeholders is crucial. A cost objective is a function or organizational subdivision for which cost data is accumulated and measured (Boyd et al., 2014). Communication of direct, indirect costs, as well as overheads could be communicated to internal stakeholders such as managers of the various cost centers through organized focus group discussions. The main aim of such internal communication is to identify deviations from the project plan and suggest potential areas for cost saving (Boyd et al., 2014). As such, information that may be considered proprietary would be actual expenditure on direct materials, labor, and production overheads vis-à-vis the budgeted amounts so as to check whether or not there are significant deviations in the different cost objectives. On the other hand, the information on costs could be communicated externally through publication of cost reports on the contractor’s website or print media. External communication will most likely take place at the completion of the project. It is most likely to focus on comparing direct and indirect costs so as to assess how much of the costs could be traced directly to the produced product or service (direct cost), and how much of the cost is attributable to overheads (indirect costs). This would be a measure of efficiency.

On a different note, I agree with the statement that as contract managers, it is important to know all available tools that will allow us to procure goods and services at fair and reasonable prices (Nash et al., 2007). To successfully negotiate goods and services on behalf of the taxpayer, the negotiator needs to develop a should-cost review, which is used to evaluate significant elements of direct costs such as materials and labor, as well as the associated indirect costs (Nash et al., 2007). A should-cost review will look at both program (manufacturing) costs and the associated overheads (Nash et al., 2007). In so doing, the contactor can come up with expectations of what would be the ideal costs for direct material, direct labor, and production overheads given the size of the project. They can then use this information to negotiate the best possible prices for direct materials, direct labor, and production overheads.