5 Critical Setup Steps for Government Contractors

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If your Architecture, Engineering, or Consulting firm performs work for the federal government, your accounting system needs to do more than produce financial statements and project invoices.

Your accounting system should be structured so that you can clearly identify direct costs, indirect costs, unallowable costs, indirect cost pools, allocation bases, and indirect rates—and then trace those amounts back to your accounting records.

For firms using Deltek Ajera, the software can provide a strong foundation for this process. However, Ajera is only as effective as the accounting structure behind it. Your Chart of Accounts, Expense Activities, Overhead Groups, Employee timekeeping, and rate structure all need to work together.

FAR 31.203 requires contractors to accumulate indirect costs in logical cost groupings and use allocation bases that reasonably allocate those costs based on the benefits received by the cost objectives. FAR 52.216-7 also requires extensive supporting schedules for final indirect cost rate proposals, including indirect expense pools, allocation bases, Chart of Accounts detail, and reconciliation to the general ledger.

So, where do you start?

Below are five critical areas to review when setting up Deltek Ajera to support FAR-related government contracting requirements.

1. Build Your Chart of Accounts Around Your Cost Accounting Structure

The Chart of Accounts is the foundation of your accounting system.

A common mistake is to set up the Chart of Accounts primarily around what is convenient for financial reporting and then try to make it work for government contracting afterward.

For government work, you need to think beyond the financial statements.

Your Chart of Accounts should support the way your firm actually accumulates and allocates costs.

That means you should be able to distinguish among:

  • Direct labor
  • Direct expenses
  • Direct consultants
  • Fringe or Direct Personnel Expense (DPE)
  • Overhead
  • General and Administrative (G&A)
  • Occupancy or other intermediate pools, when appropriate
  • Unallowable costs
  • Other indirect expenses

Ajera provides a predefined Chart of Accounts based on the type of firm selected during installation, and that structure can be modified to meet the firm’s needs.

But the important question isn’t simply:

“Does Ajera have an account for this expense?”

The better question is:

“How will this expense be treated for cost accounting purposes?”

For example, rent may be an indirect expense. But where should it be accumulated? Should it be part of a general overhead pool? Should there be a separate occupancy pool? Does your firm have multiple locations with materially different occupancy costs?

Those decisions should be made based on your firm’s actual cost accounting practices—not simply because Ajera offers a particular field or setting.

Why this matters for FAR

FAR 52.216-7 requires an indirect cost rate proposal to include schedules of claimed expenses by element of cost as identified in the accounting records and Chart of Accounts.

If your Chart of Accounts is poorly structured, preparing those schedules can become unnecessarily difficult.

A well-designed Chart of Accounts should make it easier to answer:

“Where did this amount come from, and how was it treated?”

That is an important question during any government accounting review.

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2. Set Up Expense Activities and Labor Activities Correctly

Your Chart of Accounts is only one side of the equation.

The other major component is labor.

For professional services firms, labor is often the largest cost on the books. That makes timekeeping and labor classification especially important.

Ajera activities should be structured so employees can accurately identify the work they are performing.

For example, your firm may have activities for:

  • Project management
  • Design
  • Engineering
  • Drafting
  • Construction administration
  • Research
  • Business development
  • Marketing
  • Administrative work
  • Training
  • Vacation
  • Sick leave
  • Holiday
  • Other indirect activities

The exact structure will depend on your firm.

The important point is that employees should not be forced to use vague categories simply because they are easy to create.

Consider an employee who spends four hours performing work for a client project and four hours performing internal administrative work.

Those hours should not simply become eight hours of “engineering” because that makes the timesheet easier to complete.

The system needs to distinguish the work appropriately.

Consistency is critical

FAR 31.202 and 31.203 emphasize consistency in the treatment of costs. A cost treated as direct in like circumstances should not arbitrarily become indirect in another situation.

That means your activity structure should reflect your firm’s written accounting practices.

If project management is direct when performed for a specific contract, the firm should have a consistent method for identifying that work.

If internal management time is indirect, employees need a way to record it appropriately.

Use Ajera’s overhead functionality intentionally

Ajera’s overhead groups can be used to establish overhead project, phase, activity, and account information that defaults onto employee timesheets. They can also be used to track indirect time for employee utilization reporting.

This is much more than a timesheet convenience.

It is an opportunity to design the system so that employee time naturally flows into the correct accounting treatment.

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3. Configure Overhead Groups and Indirect Cost Pools

This is one of the areas where an Ajera setup can either support—or complicate—your indirect cost accounting.

FAR 31.203 requires indirect costs to be accumulated into logical cost groupings, with allocation bases selected to distribute those costs based on the benefits received by the applicable cost objectives.

In practical terms, you need to determine:

What costs belong together?

And:

What is the appropriate base for allocating those costs?

For example, a firm might have indirect cost groupings such as:

Fringe/DPE Pool

Potentially includes costs associated with employees, such as payroll taxes and employee benefits.

Ajera defines DPE as direct personnel expense and provides functionality for tracking DPE separately from general overhead expenses.

Overhead Pool

May include indirect labor and operating expenses associated with performing the firm’s work.

G&A Pool

May include expenses associated with the overall management and administration of the business.

The actual structure should be based on the firm’s circumstances and accounting practices.

There is no universal “one-size-fits-all” overhead structure that every A/E or consulting firm should use.

Don’t create pools simply because you can

It can be tempting to create multiple overhead groups because Ajera makes it possible.

But more pools do not automatically mean better accounting.

FAR 31.203 specifically recognizes that cost groupings should be practical and should not unnecessarily complicate the allocation process when a less precise method produces substantially the same result.

The goal is to create a structure that is logical, supportable, consistent, and appropriate for your business.

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4. Create an Overhead Rate Schedule That Connects the Pool, Base, and Rate

Once your cost pools are established, you need to determine how those costs will be allocated.

This is where your indirect cost rate structure becomes critical.

An indirect rate generally consists of:

Indirect Cost Pool ÷ Allocation Base = Indirect Cost Rate

For example, if a firm’s overhead pool contains $1,000,000 of allowable indirect costs and the applicable allocation base is $2,000,000, the resulting overhead rate would be 50%.

The calculation itself is simple.

The difficult part is determining whether the pool and base are appropriate.

FAR 31.203 requires the allocation base to be common to the cost objectives receiving the allocation and to allocate the costs based on the benefits accruing to those cost objectives.

Your rate schedule should therefore clearly identify:

  • The indirect cost pool
  • The accounts included in the pool
  • The allocation base
  • The accounts or costs included in the base
  • The resulting rate
  • The period covered by the rate

FAR 52.216-7 specifically identifies a summary of indirect expense rates showing the pool, base, and calculated rate as part of an adequate final indirect cost rate proposal.

Your rate should reconcile to your accounting records

This is extremely important.

You should be able to start with your general ledger and identify the expenses included in the pool.

Then you should be able to identify the allocation base.

Then you should be able to calculate the rate.

Then you should be able to trace how that rate was applied.

In other words:

General Ledger → Cost Pool → Allocation Base → Indirect Rate → Contract Cost

That trail should make sense.

5. Establish Strong Timekeeping, Unallowable Cost, and Reconciliation Controls

The fifth area is one that is sometimes overlooked because it isn’t simply an Ajera “setup screen.”

It is the control environment surrounding the system.

Even a beautifully configured Ajera database will not solve problems caused by inaccurate timekeeping or inconsistent accounting practices.

Timekeeping

Employees should record their time accurately and consistently.

If someone works on three projects and then spends time on marketing, administration, and vacation, the timesheet should reflect those activities appropriately.

Employees should not simply “fill in” time at the end of the week based on memory.

Your internal procedures should establish expectations for timely and accurate time entry, corrections, approvals, and documentation.

Unallowable costs

Your system should also provide a way to identify costs that are not allowable under the applicable contract or FAR cost principles.

The goal is not simply to delete those expenses.

You generally want the accounting records to preserve the transaction while clearly identifying its accounting treatment.

That makes it possible to reconcile financial information while excluding appropriate amounts from claimed costs.

Reconciliation

Your accounting system should support regular reconciliation between:

  • General ledger expenses
  • Direct labor
  • Direct project costs
  • Indirect cost pools
  • Allocation bases
  • Indirect rates
  • Contract costs
  • Payroll records

FAR 52.216-7 specifically identifies reconciliation of the books of account/general ledger and claimed direct costs by major cost element, as well as reconciliation of total payroll to total labor cost distribution, among the information that may be required in a final indirect cost rate proposal.

That means reconciliation should not be something you try to figure out at year-end.

It should be part of your normal accounting process.

Common Deltek Ajera FAR Setup Mistakes

Even experienced Ajera users can run into problems when the accounting structure was originally designed for commercial work and government contracting was added later.

Here are several issues I commonly recommend firms review.

1. Using the default Chart of Accounts without reviewing it

Ajera provides industry-specific starting points, but your firm’s government contracting requirements may require additional accounts or different classifications.

2. Mixing direct and indirect costs

If similar costs are treated differently without a documented reason, your allocation methodology can become difficult to defend.

3. Using one overhead pool for everything

One pool may be appropriate for some firms, but not necessarily for every firm.

The appropriate structure depends on the nature of the firm’s operations and whether costs have materially different allocation characteristics.

4. Creating overhead activities that are too broad

“Administrative” may sound convenient, but it can make it difficult to understand what employees are actually doing.

More meaningful activities can improve reporting and cost classification.

5. Failing to identify unallowable costs

A firm needs a consistent process for identifying and segregating costs that should not be included in claimed costs.

6. Treating billing rates as indirect cost rates

This is an important distinction.

Ajera billing rate tables are used to establish billing calculations for labor, expenses, and consultants and can include overhead and profit markups.

A billing rate is not automatically the same thing as an indirect cost rate.

Your billing rates may include overhead recovery and profit, while your indirect cost rates are used for cost accounting and allocation purposes.

Confusing the two can create significant reporting problems.

7. Failing to reconcile rates to the general ledger

A rate should not simply be a number entered into Ajera because it “looks right.”

There should be supporting calculations behind it.

A FAR-Ready Ajera Setup Is More Than Software Configuration

One of the biggest misconceptions I see is the idea that becoming ready for government contracting is simply a matter of checking the right boxes in Ajera.

It isn’t.

Ajera is the tool. Your accounting methodology is the foundation.

Your firm needs to determine how costs are classified, accumulated, and allocated before the software can be configured appropriately.

That means asking questions such as:

  • What costs are direct?
  • What costs are indirect?
  • What costs are unallowable?
  • What indirect cost pools does the firm need?
  • What allocation base is appropriate for each pool?
  • How will employees record direct and indirect time?
  • How will overhead costs be accumulated?
  • How will G&A be calculated?
  • How will the rates be reconciled to the general ledger?
  • How will changes to the accounting practices be documented?

Once those questions are answered, Ajera can be configured to support the process.

Final Thoughts

A properly configured Deltek Ajera system can give an architecture, engineering, or consulting firm a much stronger foundation for managing government-contract accounting.

But the objective should not be to make Ajera “look FAR compliant.”

The objective should be to create an accounting system that accurately reflects the firm’s actual business practices and consistently applies its documented cost accounting methodology.

When the Chart of Accounts, activities, overhead groups, indirect cost pools, allocation bases, timekeeping procedures, and rate schedules all work together, your firm is in a much better position to produce reliable financial information and support its indirect cost rate calculations.

And perhaps most importantly, the process becomes much easier to manage when you don’t wait until the end of the fiscal year to discover that your accounting structure isn’t producing the information you need.

Need Help With Your Deltek Ajera Setup?

AE Advisory Services LLC specializes in helping professional services firms get more out of Deltek Ajera.

If your firm performs government work—or is preparing to pursue government contracts—We can help review your Ajera configuration and identify areas that may need attention, including:

  • Chart of Accounts structure
  • Direct and indirect cost classifications
  • Expense and labor activities
  • Overhead groups
  • DPE and overhead settings
  • Indirect cost pools
  • Allocation bases
  • Overhead rate schedules
  • Unallowable cost identification
  • Timekeeping structure
  • Financial reporting and reconciliation

The goal is a practical Ajera configuration that supports accurate project accounting, consistent cost allocation, and better preparation for government-contracting requirements.

Contact AE Advisory Services LLC today to schedule an Ajera accounting and FAR setup review.