How to Make QuickBooks DCAA Compliant

One of the most common questions small businesses ask when entering into the government contracting world is: “Is QuickBooks DCAA compliant?”

The short answer is no. While it does meet/perform several of the items on standard form (SF) 1408, QuickBooks on its own is not a fully DCAA compliant accounting system. Rather, it must be setup to be compliant and supported by other software & systems, and specific policies & procedures (what we call the “satellite system” surrounding your QuickBooks general ledger).

So, how do you make QuickBooks DCAA compliant? Let's start with what it does and does not offer.

Which Aspects of QuickBooks are (or can be) DCAA Compliant?

The SF1408 is the evaluation checklist used by DCAA to audit approved accounting systems. From the checklist, QuickBooks allows for the following (with proper customization):

1. The accounting system is in accord with generally accepted accounting principles (GAAP).
   1. Your documented accounting policies and procedures should specify how you record transactions with GAAP in mind.
   2. ReliAscent provides an accounting manual to all our monthly clients to cover proper policies and procedures of our accounting system.
2. Proper segregation of direct costs from indirect costs.
   1. There are several ways you can show segregation of direct from indirect costs in QuickBooks: chart of accounts, items vs expenses, direct project codes, classes.
   2. The chart of accounts can further segregate indirect costs by cost pool.
   3. Reporting in QuickBooks allows you to see costs accumulated by project.
3. Identification and accumulation of direct costs by contract.
   1. QuickBooks allows you to tag transactions by customer/job code/sub task.
   2. Job reports in QuickBooks aggregate costs in summary, by element and by transaction detail.
4. Accumulation of costs under general ledger control.
   1. QuickBooks operates under general ledger control, therefore all ledgers and subledgers are controlled by the general ledger.
5. A labor distribution system that charges direct and indirect labor to appropriate cost objectives.
   1. Using the time data from a DCAA compliant timekeeping system, QuickBooks can perform a labor distribution using the payroll module. It takes the timesheet data and applies salary dollars to each cost objective and posts to the general ledger.
   2. ReliAscent also performs reconciliations to confirm the labor dollars can be tied back to the timesheet data. This is an important process to do to ensure auditable labor dollars.
6. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account.
   1. QuickBooks accommodates posting individual labor and non-labor transactions on the proper date. Each transaction can be identified as direct to a specific contract, or indirect.
   2. QuickBooks has a reconciliation module to reconcile bank and credit card transactions per monthly statements to ensure completeness of financial data.
7. Exclusion from costs charged to government contracts of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions.
   1. Costs can be tagged as unallowable in QuickBooks using the chart of accounts or classes.
   2. It is important to understand what costs are considered unallowable, so proper procedures on unallowable costs are recommended.
   3. ReliAscent provides descriptions of expressly unallowable costs as in FAR part 31 with our accounting manual as well as segregating unallowable costs with a cost pool in the chart of accounts.
8. Identification of costs by contract line item and by units (as if each unit or line item were a separate contract) if required by the proposed contract.
   1. The customer center of QuickBooks allows for jobs and sub jobs to support contract requirements to track to a specific level of detail for invoicing.
   2. Transactions can be posted with quantities to signify units.
9. Segregation of preproduction costs from production costs.
   1. QuickBooks can support separation of preproduction costs in a couple ways: using sub jobs, reporting using cutoff dates and accounting processes that establish when a job is initiated.
10. Required to support requests for progress payments.
    1. Progress payments are usually cost-based. The QuickBooks subsidiary job cost ledger provides details from the accounting system to use for interim progress payments for a specific project.
       
       

Where QuickBooks Falls Short of DCAA Compliance

Again, using the government’s SF1408 as our guide, there are a number of ways in which QuickBooks (Desktop and Online) is not compliant, and will require supporting systems to be setup and properly maintained by an expert DCAA consultant or government contract accounting firm.

1. A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives. (A contract is final cost objective.)
   1. A DCAA compliant accounting system should be able to calculate indirect rates per your company rate structure. Using those rates, the accounting system should allocate the correct proportion of costs to each final cost objective.
   2. ReliAscent’s proprietary software consistently calculates indirect rates and allocates them to final cost objectives. This provides a comprehensive look at each project, providing both direct and indirect allocation of costs. Our software is also capable of showing burdened costs at provisional and actual costs. Because we use our own internal software to calculate rates, ReliAscent does not require our clients to subscribe to costly, third party software (as most government contract accounting firms do).
2. A timekeeping system that identifies employees' labor by intermediate or final cost objectives.
   1. A DCAA compliant timekeeping system should be able to track daily time for each employee to the lowest level of detail required by a contract. It should track both direct time to projects as well as indirect time.
   2. The system should be equipped with an employee signature and supervisor approval process.
   3. Timesheets can be kept manually or in an approved electronic timekeeping system.
   4. ReliAscent provides monthly accounting clients with a timekeeping procedure to accompany the timekeeping system.
3. Required by contract clauses concerning limitation of cost (FAR 52.232-20 and 21) or limitation on payments (FAR 52.216-16).
   1. Our proprietary project cost reports include contract information to keep track of budgetary ceilings. This allows visibility for our clients to see project progress.

QuickBooks is a great option for small businesses. It is an inexpensive and user-friendly system compared to more complex and expensive government contract accounting systems like Deltek or Jamis. Those ERP systems can be customized to be fully compliant without additional add-ons, but can be overwhelming and cost prohibitive to startup businesses. Further, as most small businesses using these systems quickly realize (and is a common complaint we hear from contractors), it can also be difficult to find accounting staff that have the required experience with these systems to keep them functioning properly and in compliance. 

At ReliAscent (like most government contract accounting firms), we utilize QuickBooks Desktop (Enterprise) for all our client’s accounting needs. It is simple and flexible, but robust enough to be scalable as your business grows (the same cannot be said for QuickBooks Online, which requires a larger system of supporting software and processes to be made DCAA compliant, and is not scalable as the business grows).

In addition to QuickBooks Desktop, ReliAscent uses our proprietary software coupled with one of many approved timekeeping systems to provide a fully compliant government job cost accounting system.

Our proprietary software provides a logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives by calculating indirect rates and providing job cost reports. It also tracks any limitation of costs or payments.

Clients have many options for DCAA compliant timekeeping systems, and can choose from many systems when we first setup their system, from a manual timekeeping system (Excel-based), to Hour Timesheet, QuickBooks Time and SpringAhead.

Finally, we round out the compliant accounting system with a proper set of policies and procedures that outline how our compliant accounting system operates.

Maintaining DCAA Compliance in QuickBooks

Setting up a DCAA compliant QuickBooks accounting system is really just the start; it only gets contractors through the door, so to speak. And this is the part that many startups overlook and tend to oversimplify. Many contractors contact ReliAscent asking us to simply “set them up with a compliant accounting system that they can operate by themselves.”

This question comes up every week, and unfortunately, the answer is not what many companies want to hear (at first).

The reality is that just about any government contract accounting firm in our industry should be able to setup a compliant accounting system and provide contractors with a basic set of policies and procedures so that they can pass a PreAward Audit. And many new contractors are looking for that quick and easy solution to their compliance problem—something that can be setup and turned over to the small business owner, or maybe their bookkeeper or office manager—so they can continue performing the accounting as they had done previously, or in other businesses.

However, if the system is not maintained in compliance by an accountant with extensive experience with the Federal Acquisition Regulations (FAR) and DCAA, it’s simply “garbage in, garbage out,” as the saying goes. It is only a matter of time before the system will fall out of compliance, and the contractor will fail a DCAA audit (which is why there is a distinct lack of government contract accounting firms that only setup accounting systems, without also providing ongoing support or complete outsourced accounting services).

At ReliAscent, once your system is setup, our outsourced accounting teams, consisting of a dedicated Bookkeeper, a Senior Accountant, optional Controller, and the Account Executive (your outsourced CFO and Contracts Manager all-in-one), maintain DCAA compliance in the QuickBooks system moving forward. While most clients simply outsource this entire function to our accounting teams, larger clients (with an existing accounting staff), may opt to have their staff trained to handle the data entry into the system, and can also assume other tasks such as payroll or invoicing the government through WAWF, while our accounting teams handle the month-end close and complex financial reporting required by the government.

Passing a DCAA Audit with your QuickBooks Accounting System

You can be confident in ReliAscent’s abilities to assist you in an accounting system audit. We have successfully passed countless audits with our tried-and-true QuickBooks-based compliance package. If you would like to learn more about how ReliAscent's experts can install a DCAA compliant QuickBooks accounting system (or convert your existing QuickBooks system to meet DCAA requirements), contact us today! 

Image credit: https://quickbooks.intuit.com/