Cost accounting and financial reporting

4.1

Contractors with QDCs and QSCs may agree with the Secretary of State a methodology for the allocation and apportionment of costs to be used in the contract.

4.2

In order to be Allowable, the contractor must be able to demonstrate that costs have been allocated in a way that is reasonable and which avoids over-recovery. Where the contractor’s costing system for the Secretary of State’s work is different from that used for other work, additional care will be needed in this regard.

4.3

The contractor should be able to identify and record all costs associated with delivering a contract. The contractor should separately identify and record costs that are Allowable and charged to the MOD and those which are incurred but are not Allowable. The SSRO does not otherwise provide guidance about the choice of accounting systems that a contractor uses to record accounting entries.

4.4

Allowable Costs in QDCs and QSCs may be either direct costs or indirect costs. The SSRO is not prescriptive about whether costs are categorised as direct costs or indirect costs but the MOD will want to be satisfied with the treatment of costs and the method of allocation and apportionment to the contract.

4.5

Direct costs will be those that are directly Attributable to the contract. Indirect costs which enable the performance of the QDC or QSC may be Allowable if both the cost and the method of allocation and apportionment satisfy the AAR principles. The method used should be consistent with any method previously agreed between both parties unless a change is necessary for the QDC or QSC in question.

4.6

Some costs may be determined through the use of recovery rates which are applied to an appropriate recovery base. The agreement of estimated and actual rates will be determined between the contractor and the MOD.

4.7

The SSRO does not provide guidance in relation to the preparation of financial statements for statutory reporting purposes. Contracting companies may adopt a variety of accounting policies and make judgements in the preparation of financial statements for statutory reporting purposes (for example, International Financial Reporting Standards and UK Generally Accepted Accounting Practice). Application of these policies to QDCs will not necessarily result in costs charged satisfying the AAR principles and contractors must have regard to this guidance.

4.8

Users of this guidance should be aware that the SSRO has developed the Defence Contract Analysis and Reporting System (DefCARS) to enable contractors to submit contract and supplier reports. These reports include information on Allowable Costs including estimates, approved rates, forecast and actual costs. The SSRO has developed statutory guidance to assist contractors to meet their reporting obligations under the Act and the Regulations.