Government Contracting 101 - Part 2: Who is the DCAA, and What is DCAA Compliance?

The Defense Contract Audit Agency (DCAA) was founded in 1965 under Robert McNamara, the Secretary of Defense from 1961 to 1968.  Its function is to perform all contract audits for the Department of Defense.  Prior to 1965, each U.S. Military branch had separate contract audit functions and regulations. 

However, contractors and government personnel recognized the need for consistency.  In May 1962, Robert McNamara instituted “Project 60,” to examine whether it was feasible to centrally manage contract administration and audit services.  The outcome of the study was the decision to establish the DCAA (and the DCAA began operations on July 1st, 1965).

The DCAA performs many different types of audits, but for the newcomers to the industry, the first contact with the DCAA is to perform an audit prior to an award of a cost type contract.  This is called a “pre-award audit.”  This audit is an overview look at your accounting system to ensure that you have the correct pieces in place to manage the government’s money.  The DCAA provides you with a checklist of everything that you need to pass this audit.  In fact, the entire DCAA “play book” is available on their website for everyone to review, study and memorize.  This is called the DCAA Contract Audit Manual (CAM), and is how all audit activities within the DCAA are performed. You will also hear it called the DCAM.  They have a shorter version (CliffsNotes™ if you will), called the Audit Process Overview, which includes the “Information for Contractors” which is an invaluable guide for a company facing a DCAA audit.  The Audit Process Overview contains links and introductory information on the government auditing process and specific information for small business contractors.

The term “DCAA compliance” is terminology that is commonly used and means that a system is adhering to the regulatory guidance that the DCAA uses.  These regulations are the Federal Acquisition Regulations (FAR), Defense Federal Acquisition Regulations Supplement (DFARS), and Generally Accepted Accounting Principles (GAAP) as well as the guidelines outlined in the DCAM. To insure compliance with these regulations, the DCAA performs many different types of audits and checks.

For example: the DCAA performs “Floor Checks” on timekeeping systems.  These are unannounced, site-visit checks of your timekeeping practices.  The DCAA also audits your timekeeping system for compliance.  What they are looking for is a system that provides the following (they review these items during a floor check as well):

  • Employees track and record their time at least daily
  • Employees track time to a specific cost objectives and into the appropriate indirect pools, including holiday, sick and vacation
  • Employees track all their time, accurately (and preferably to the ¼ hour)
  • There is a way to track changes to time cards
  • Only the employee is annotating their own time
  • Employees are issued pre-populated timecards
  • There is supervisory control and approval
  • Your accounting system has a way to record or download these timesheets
  • Your accounting system has a way to handle overtime, compensated or uncompensated.

The DCAA may also be auditing your accounting system, depending on the risk assessment done by the Contracting Officer (CO).  They are looking for GAAP-based accounting, and to see that all your accounts and pools are under general ledger control, including your contracts/grants.  They also want to see if you properly segregate direct and indirect costs, and whether you can identify accumulated direct costs by the contract/grant.  There should be a way to segregate what the FAR terms “Unallowable” costs so that they will not be billed to the government. They will want to see if you have a system to close your books monthly, calculate your indirect rates and prepare accurate costs per your predetermined rate structure.  Further, they will want to know if your system provides the ability to limit costs based on contract limitations (total price, fee, rates)? They will be looking to ensure that you understand your accounting system, rate structure, labor distribution, allocations, unallowables, etc.  This is a fairly invasive audit and should not be taken lightly.

It is the job of the DCAA to ensure that you have the tools to spend the government’s money wisely, and that your accounting system is functional and can withstand future audits.  Their goal is to make sure the government (and thus the American taxpayer) gets the best value for the money they spend.  The DCAA reports annually to Congress on their audit findings and the efficiency of the agency.  In the past several years, the agency has found enough errors in audit to return to the government (the taxpayer), 5 to 7 times the budget of the DCAA.  For this reason alone, they will continue to exist for the foreseeable future.  If you have additional questions concerning the DCAA and/or your firm’s compliance, please contact the experts at ReliAscent.

 - Brian Ormsby, ReliAscent