Fractional CFO for Government Contractors

None of these are familiar to most CFOs. And yet government contractors need to operate within all of them — because the federal government's rules for what it will and won't pay for are specific, audited, and consequential.

The Federal Acquisition Regulation (FAR) governs how the federal government procures goods and services. The Defense Federal Acquisition Regulation Supplement (DFARS) adds additional rules for defense contractors. Cost Accounting Standards (CAS) govern how defense contractors must account for costs — and deviations from CAS require disclosure and government approval.

I've worked with government contractors — defense contractors, IT services firms, construction companies with government work — and the consistent pattern: the people who run these companies are operationally excellent at the government work. They know the specs, they know the compliance requirements, they know the delivery expectations. The finance side — the compliance accounting that makes the government work payable — is where they're consistently underserved.

This is the gap a government contracting CFO fills: someone who speaks this language, understands these rules, and can build the accounting infrastructure that makes the compliance work.

The indirect cost structure:

B&P (Bid and Proposal): The cost of preparing proposals for new contracts. This is a bid cost that the government allows to be recovered on future contracts — if it's properly tracked and included in the indirect cost pool.

IRAD (Independent Research and Development): The cost of R&D that isn't directly billable to a specific contract. Defense contractors are required to track IRAD separately, and it's recoverable on future contracts.

G&A (General and Administrative): The overhead of the business — executive salaries, HR, accounting, facilities. G&A is applied as a percentage of direct labor, and it determines how much of the business's overhead the government contract is absorbing.

The indirect cost rate is usually negotiated with the government — typically annually or every few years. A contractor with a G&A rate of 15% recovers less overhead per dollar of direct labor than one with a G&A rate of 20%. But a higher G&A rate makes the contractor less competitive on labor-heavy work. The CFO's job is to manage the indirect cost structure to maximize recovery without sacrificing competitiveness.

The trap most government contractors fall into: their accounting system isn't tracking indirect cost pools correctly, and their indirect cost rates don't reflect actual cost. This means they're either over-recovering (which creates a liability to the government) or under-recovering (which means they're subsidizing the government with their own margin).

This is due 6 months after the fiscal year ends. Most government contractors don't know this until their contract officer tells them. And the incurred cost submission for a complex multi-year contract portfolio with multiple indirect pools can take 2-4 months to prepare correctly.

The consequences of a late or incomplete incurred cost submission aren't abstract. The government can withhold payment on current invoices until the submission is received and accepted. In extreme cases, the contractor's indirect cost rates are frozen at the prior year's rates — which can create significant cash flow problems if the actual rates were significantly different.

A fractional CFO for a government contractor manages the incurred cost submission calendar, ensures the accounting system can produce the required report, and coordinates with the DCAA auditor when they review it. The submission is prepared and filed on time — which sounds simple but is almost never simple.

A contractor who isn't tracking prevailing wage compliance is exposed to back-wage claims from the Department of Labor — which can be significant if the violations are systemic. I've seen a government services company discover that they had been underpaying field technicians by $2-$4/hour across an entire year. The back-wage liability was $400K.

The CFO's job isn't to replace HR's knowledge of SCLS requirements — it's to ensure the payroll system is properly classifying employees by the correct labor category and rate, that the prevailing wage determinations are being tracked as they change, and that any variances between actual paid rates and the DOL rates are being identified before the annual compliance review.