DCAA COMPLIANT ACCOUNTING SYSTEMS
WHO IS THE DCAA?
The Defense Contract Audit Agency (DCAA) is the Federal Government’s auditor tasked with reviewing a contractor’s compliance with FAR regulations and other requirements. In addition to audits and compliance checks, they provide general guidance to contractors to help them better understand how to work with the government via their Defense Contract Audit Manual (DCAM).
WHAT IS A DCAA APPROVED ACCOUNTING SYSTEM?
WHAT IS "DCAA COMPLIANCE?"
Attaining "DCAA Compliance" means your accounting & timekeeping policies and financial management systems are setup in accordance with the requirements and recommendations found in the Federal Acquisition Regulations (FAR) and the DCAA's Contract Audit Manual (DCAM), so that they can successfully pass a DCAA Audit. A compliant government contract cost accounting system must have the following features and meet the following conditions (as outlined by the Federal Government's SF1408 Pre-award Audit Survey and FAR Part 31):
- It must meet Generally Accepted Accounting Principles (GAAP), and GAAP compliance must be maintained at all times (see FAR part 31.202 and .203).
- Direct costs must be segregated from indirect costs (i.e. pooling costs into separate cost pools). Simply put: your small business must have a policy defining what is a direct cost and an indirect cost. It must establish when cost elements may be charged direct and indirect, and it must separate accounts for each cost element in enough detail for the DCAA auditor to understand and approve in a DCAA audit.
- Costs must be accumulated by cost element & project, and for each direct cost transaction, a job (or project number) must be assigned. Cost elements typically include direct materials, labor, subcontracts, travel, consultants, other direct costs (ODC's). Just as important: the contractor must be able to provide reports to the DCAA showing these direct costs by cost element, project, job, or contract (this should also be outlined in a contractor's policies and procedures). This is the heart of a "job cost accounting system," which makes up the foundation of DCAA compliant accounting.
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Cost accumulation must be under the general ledger control. This means that costs (both direct and indirect) are accumulated in QuickBooks® (or other accounting software) under dual entry general ledger control, and job costs are accumulated into general ledger accounts.
- Direct and indirect costs must be reconciled monthly in the general ledger.
- The timekeeping system must meet strict DCAA requirements. Errors related to timekeeping are the number one finding and reason for a failed DCAA audit. Given this reality, setting up and maintaining an adequate timekeeping system is critical. While it can be manual (excel spreadsheets or paper timecards), to reduce the extremely high risk of errors, it is recommended a contractor use an automated software. Timekeeping requirements include important practices such as labor being identified by contract or task order, time being recorded daily by employees, and supervisor approval of timecards. To learn more about DCAA's timekeeping requirements, visit our DCAA Compliant Timekeeping page.
- A labor distribution system that charges direct and indirect labor to appropriate cost objectives (contracts/grants). Your business' timekeeping data is accumulated for each individual, per pay period, and then entered into QuickBooks® after final approval, where it is reconciled. Labor distribution must provide labor hours and labor dollars by employee, by job, and indirect labor accounts.
- It must provide a monthly determination of costs and recording of costs. This means posting your expenses monthly, and a contractor must be able to provide project reports on a monthly basis which detail the total costs incurred on a given project (including indirect cost allocations).
- It must be able to identify, exclude, and track unallowable costs. This is achieved by setting up a pool in the chart of accounts which collects FAR 31 Unallowable expenses, and employees must be trained to identify and exclude these unallowable costs (and note the unallowable direct and pool expenses are excluded from billing). For more information, see FAR part 31.201-6.
- All costs must be identified by a CLIN (contract line item).
- Pre-contract/award costs must be segregated from any contract costs. The government must be assured it is only paying for its fair share of contract expenses.
- It must provide the necessary financial information to demonstrate compliance with the Limitation of Funds clause and to support progress payments.
To learn more about DCAA compliance, download our white paper: "A Quick Guide to DCAA Compliant Accounting - Understanding the SF1408" (no need to fill out a form).
CAN I REQUEST A DCAA AUDIT?
Once you determine DCAA compliant accounting is required for your award (or to simply submit a proposal, in rare cases), the next logical question contractors ask is "how do I request a DCAA audit?" The answer is that you cannot simply request a DCAA audit to certify your system. Rather, DCAA will audit your accounting and timekeeping systems at specific times or due to specific events, at the request of another federal entity (visit our DCAA Audit Support page to learn more about the different audit types). For example, when your small business is selected for an qualifying award, like a cost type Ph II SBIR/STTR contract or grant, you will likely be asked to certify the current state (compliance level) of your accounting system via the government's SF1408 Preaward Audit Checklist. This will be the first step, prior to DCAA performing an SF1408 audit or complete accounting systems audit.
SETTING UP A COMPLIANT QUICKBOOKS® ACCOUNTING SYSTEM
At ReliAscent®, our experts handle the setup process (installation, migration, or conversion) for you. We start by setting up a compliant chart of accounts in either QuickBooks® Enterprise or Online (we recommend larger and rapidly growing clients use Enterprise, as it is more robust and scalable than Online), a compliant timekeeping system, and then provide an accounting manual and template policies and procedures that will be required to maintain the system and pass an audit.
Though Enterprise is a desktop software, by hosting it on the cloud, both the client and the accounting team can access their accounting system from anywhere at anytime—just like QuickBooks® Online.
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Is your company a new start-up, or have you been in business for several years?
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Are you backdating to January 1st of the current year, going back even further, or starting on a specific date?
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What is the current condition of your books? Are there unresolved issues?
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What gaps exist in your books and how long will it take to address each?
Once ReliAscent® determines your "road map to compliance," we provide you with a quote and expected lead time for the setup/migration. In general, setting up a client on our platform will take 1- 2 weeks and typically costs between $2,000 - $5,000 (depending on the factors above).
The steps involved in the installation or migration process can differ depending on your specific circumstances, but the following list is a rough order of tasks that we perform:
- Install a general ledger program (ReliAscent® recommends a desktop version of QuickBooks®), or bring your current general ledger into compliance by...
- Formatting a company template within the general ledger program to:
- Structure a Chart of Accounts (or restructure your COA)
- Segregate the direct and indirect expenses
- Isolate unallowable expenses
- Set up a job cost environment where the direct expenses may be charged to a single final cost objective
- Set up the labor distribution system
- Insure GAAP compliance
- Establish compliant timekeeping practices or software (either manual or automated) - we recommend Hour Timesheets, SpringAhead, or GHG/ClockWise.
- Establish periodic payroll meeting government requirements
- Establish a method to perform:
- Indirect Rate calculations (typically, the government likes these monthly)
- Provide for Subsidiary Job Cost Reports in a fashion that the government prefers
- Establish your policies and procedures
- Training your employees (timekeeping software, daily journal entries, etc.)
While this list can provide you with an understanding of the steps involved, your situation may be different, and may need to be tailored to your specific needs, based on your previous history, the accounting software used, and whether or not your general ledger was previously setup to be compliant. In these cases, the following FAQ section can provide a more specific process based on your situation.
