6 Challenges for Tech Businesses with Government Contracts

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Government contracts can be both enticing and daunting for technology businesses. On the one hand, they offer a significant opportunity for growth and financial stability. But, on the other hand, adequately navigating the intricacies that come with government-funded projects can be challenging to do.

Government-funded projects can range from building critical infrastructure to developing cutting-edge technology solutions. These projects are often characterized by substantial budgets and the potential for long-term partnerships. But, they come with their own set of red tape that includes navigating complex jurisdictional challenges, as well as administrative and financial regulations, and more.

Overcoming the challenges of partnering with government entities

At Fusion CPA we have helped many technology businesses overcome some of the accounting hurdles that come with government contracts, and helped them foster successful partnerships. In this article, we will delve into some of the common challenges to be aware of when doing business with the government and help you establish working strategies to overcome them.

1. Complex regulations

The first challenge that technology businesses face when entering the realm of government contracts is the complex regulatory environment.

Essentially it comes down to the fact that government entities operate within a framework of laws designed to ensure transparency when it comes to resource allocation. Failing to comply with these financial regulations can have serious consequences, including contract termination, fines, and legal liabilities. For this reason, tech businesses partnering with the government would need to have patience and insights into why meticulous compliance is required.

To overcome the challenge of a complex regulatory environment, technology businesses must stay up-to-date with changing regulations, implement robust internal accounting controls, and conduct regular audits to ensure compliance. It is advisable to invest in the right accounting software to aid compliance, and partner with a CPA that understands state systems and processes, to ensure a smoother partnership.

2. Strict audit requirements

Because audits aid in verifying the accuracy, integrity, and legality of financial and operational processes within a project, technology businesses partnering with the government must embrace the auditing process.

For technology businesses, the prospect of audits can be intimidating. It typically involves a thorough examination of financial records and project documentation to ensure compliance with contract terms. Irregularities in this regard can put the contract and reputation of the business in jeopardy.

To mitigate this, it is advisable that tech businesses have accurate and robust accounting record-keeping systems in place. It is advisable to implement controls to help identify and rectify issues before they become audit findings. Additionally, partnering with CPAs who understand the requirements that come with government contracts can be beneficial in this regard.

3. Cost Accounting Standards Compliance

Cost Accounting Standards (CAS) are a set of regulations that govern the accounting practices of government contractors. CAS compliance is a critical aspect of government contracts, especially for technology businesses that receive reimbursement for incurred costs. These standards dictate how costs are allocated and accounted for in government-funded projects. Non-compliance with CAS can result in contract disputes, and navigating this can be complex.

Following years of experience with this, our CPAs highly recommend that technology businesses invest in specialized accounting systems that have the infrastructure and features to ensure that your accounting practices align with these standards.

4. Indirect cost rate proposals

Indirect cost rate proposals are a crucial aspect of government contracts. These proposals determine how indirect costs, such as overhead and administrative expenses, are allocated to specific contracts. The process involves calculating an indirect cost rate that is applied to contract costs to determine the allowable indirect costs.

Preparing indirect cost rate proposals requires a thorough understanding of cost allocation methodologies and compliance with government regulations. To make things easier, technology businesses should maintain detailed records, conduct regular cost allocations, and seek guidance from experts in government contract accounting.

5. Managing cash flow

Cash flow management is crucial to the success of businesses in general, but becomes even more important when dealing with government contracts. Government agencies often have specific payment terms and timelines, which may not align with a business’s regular cash flow needs. This may be in conflict with the method of accounting your business makes use of. You would need to ensure documented protocol to ensure that these payments are accurately allocated into your accounting system.

Effective cash flow management is crucial to ensure that ongoing project expenses can be covered while awaiting government payments. This challenge can be exacerbated if government payments are delayed or if there are disputes over-invoicing.

Working with your CPA to ensure efficient cash flow forecasting models that take into account government contract payment schedules, and eventualities can help in this regard. Establishing lines of credit or contingencies in the event of invoice delays can also provide financial flexibility during periods of uneven cash flow.

6. Intellectual Property and data rights concerns

Data rights and Intellectual property (IP) are crucial for technology businesses that engage in government contracts. It can quite quickly become a grey area that could lead to endless legal issues. Government entities often partner with tech companies for the development of proprietary technology, software, or data solutions. It’s essential to clarify ownership, usage rights, and data protection measures within the contract to avoid disputes down the road.

To address IP and data rights concerns and mitigate potential disputes, businesses should work closely with legal counsel to draft comprehensive contracts that protect their intellectual property and data.

Government contracts offer substantial opportunities for technology businesses. However, it is important to understand the challenges to maintain a successful business partnership. By investing in the right tools and partnerships, your business can succeed.

At Fusion, our CPAs have helped many technology businesses foster successful partnerships with government entities. We have implemented the right accounting software and process controls to ensure compliance. Contact us if you need guidance in this regard. 


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