The Cost of Compliance for Government Contractors

From the perspective of a government contracting company, how much does compliance truly cost? Compliance cost refers to all the expenses that a firm incurs to comply with industry regulations.

Despite this simple definition, the cost of compliance is difficult to calculate for most government contractors. This is because the responsibility for compliance tends to be distributed throughout the organization.

While a company’s compliance department may have a budget, compliance-related activities performed by the accounting, contracts, purchasing, human resources and IT departments are rarely separated from their other responsibilities – nor would it always be feasible to do so.

What is the cost of compliance?

Though the precise cost of compliance may be difficult to determine, there is research available on the topic.

The National Bureau of Economic Research estimated the cost of compliance for US firms in 2022 averaged 1.34% of their total wages. The National Association of Manufacturers estimates that the average U.S. company pays $9,991 per employee per year to comply with Federal regulations and the average manufacture pays nearly twice that amount. The Securities and Exchange Commission once estimated that the annual cost of compliance with Sarbanes Oxley at $91,000, which to many was an underestimate.

As government contracting is a highly regulated industry, we can safely assume contractors are incurring significant compliance costs. Contractors performing in multiple states or countries will have even higher compliance costs.

Here’s where government contractors can accrue costs related to compliance with federal regulations.

Common compliance expenditures for government contractors

Though compliance requirements vary between contractors, the following list represents typical examples of compliance expenditures.

• All contractors should develop a:
  • Code of business ethics
  • Fraud hotline
  • Compliance training program
  • For large businesses: a Chief Compliance Officer with an accompanying series of internal controls
• Contractors who bid and win FAR Part 15 negotiated contracts will need:
  • An adequate accounting system
  • A compliance department focused on accounting
  • Large businesses may become subject to the Cost Accounting Standards (CAS)
• Small business’ need to comply with the SBA regulations regarding:
  • Size standards
  • The 8(A) program
  • Limitations of subcontracting
  • Mentor-Protégé joint ventures

Additional potential compliance expenditures include:

• An ERP system – specifically one that is government contractor-oriented and that supports compliance-oriented documentation and reporting requirements
• Government compliance subject matter experts
• Policies and procedures addressing:
  • Accounting
  • Human Resources
  • Purchasing
  • Estimating
  • Contracts Administration
  • Information Technology
• Contractors need to conduct internal audits of their business systems, including the compliance program
• Contractors should establish relationships with law firms and CPA firms that specialize in government contracting compliance

When it comes to compliance costs, be proactive

The wide-ranging and disparate compliance-related activities listed above have at least one thing in common: they all cost money.

Without the right ERP solution in place, it can be difficult for an individual contractor to calculate the exact cost of how much they spend on compliance. One thing is certain, however: the cost of compliance is significantly less than the costs of non-compliance.

When government contractors fail to comply, the potential fines, penalties, and loss of customer trust or reputation can prove to be much more costly than incurring or maintaining compliance upfront.

To learn more about how Aprio can help your company’s government compliance needs, visit Aprio’s compliance page. To learn more about how an ERP system can support your compliance needs, visit Unanet’s ERP GovCon page.

Donna Dominguez, Partner in Aprio’s Govcon Advisory Team, FAR Nerd and friend to Government Contractors that need support!  Be sure to friend me on (11) Donna Dominguez | LinkedIn .

Tom Marcinko is a Senior Manager in Aprio LLP’s Government Contracting Services Group. He is responsible for providing clients with a broad variety of both pre and post award support. His experience includes proposal development, contract & subcontract administration, FAR compliance, Uniform Guidance compliance, small business programs, and Government audits.