DCAA COMPLIANT ACCOUNTING SYSTEMS
Does The DCAA Approve My System?
Many small businesses are confused when first entering the government contracting world, and often ask, "does the DCAA approve my accounting system?" The answer is simply: no, they do not, and there is no official "Government Approved Accounting System." Perhaps one of the most important concepts to understand is that the term "DCAA approved accounting" is a misnomer (no software is "DCAA certified" or "approved"). There are merely accounting systems that are compliant with the FAR & DCAA requirements, and software that is designed to pass a DCAA audit. Furthermore, 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 (visit our DCAA Audit Support page to learn more about the different audit types).
What is DCAA Compliance?"DCAA Compliance" means that a contractor's policies and financial management systems are setup in accordance with regulations and guidance found in the Federal Acquisition Regulations and the DCAA's Contract Audit Manual (DCAM), in order to successfully pass a DCAA Audit. A DCAA compliant accounting system (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).
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 a 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/yo upon 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 accounting compliance, download our white paper: "A Quick Guide to the DCAA Compliant Accounting System - Understanding the SF1408" (no need to fill out a form).
Phase I SBIR/STTR Accounting - What is Required of Awardees?
Most SBIR/STTR Ph I contracts and grants are Firm Fixed Price awards (FFP) that do not require a DCAA compliant accounting system (very little is required in the way of accounting compliance, and the threat of audit of your Ph I is nearly non-existent). However, many agencies (like the National Science Foundation) may suggest Ph I winners set up a DCAA compliant timekeeping system (either manual or automated), and NIH Ph I grantees may also need guidance on how to track labor and costs, and properly invoice the government. (contact us to learn more).
If your small business has just won your first Ph I contract or grant, or you only have Ph I awards at this time, ReliAscent® recommends the following steps to prepare your business for a smooth transition into your Ph II, and to ensure you avoid potential issues with future audits or with an NSF CAP review (for NSF grantees):
- Implement a DCAA compliant timekeeping system - there are multiple automated systems that are affordable and easy to use (to see a list of our timekeeping partners, visit our DCAA Compliant Timekeeping page). ReliAscent® can also provide you with our DCAA Compliant Timekeeping Procedure and example Timecard at no charge. We highly recommend that all employees track their time regardless of whether or not they work on a particular SBIR/STTR or any other contract. This will help your business to establish and justify your indirect rates for the Ph II proposal or any other contracting opportunity you may have.
- Track ALL of your Direct Costs
- Hire a Professional (Commercial) Bookkeeper or Accountant for Ph I - though many companies try to do the accounting on their own, we always recommend that Ph I winners have a professional bookkeeper or accountant handle their books. Most local firms or bookkeepers are more affordable than a Government Contract Accounting Firm, and having a professional can help businesses when it comes to taxes or creating financial statements, etc.
- Get Professional Help with your Ph II Pricing Proposal - the time to call ReliAscent® is when you are working on your Ph II proposal. ReliAscent's experts can review your rates and budget to ensure you are not leaving money on the table or making mistakes that could cost you (potentially) tens of thousands of dollars during Ph II. Once you win your Ph II, it's time to setup your compliant system.
At ReliAscent®, we handle the setup process (installation, migration, or conversion), for you. While our experts can help contractors and grantees set up a QuickBooks file that meets DCAA and FAR compliance requirements (or a job cost accounting system that may be better tailored to small companies working with granting agencies like the NSF), which solution you ultimately choose may be based upon your personal preferences, your level of government contract accounting experience, and what types of contracts or grants you have. Though we can (in some limited cases), help larger government contractors bring their current accounting systems into compliance (and train their accounting staff to operate the system while we provide top level support), most clients are setup on the ReliAscent® QuickBooks Enterprise platform, where our accounting teams provide complete outsourced monthly accounting services (in addition to our contract management and outsourced CFO consulting services).
Cloud-Hosted DCAA Compliant QuickBooks®
In most cases, ReliAscent® will set up contractors and grantees on our QuickBooks® Enterprise platform (hosted on Amazon's GovCloud™). Though Enterprise is a desktop software, by hosting it on the cloud, both clients and the accounting team can access their accounting system from anywhere at anytime—just like QuickBooks® Online (but without the compliance issues and added work required to setup and maintain DCAA compliance with the Online version). Once the setup is complete, clients typically outsource their monthly accounting to ReliAscent®. However, for those businesses with a full accounting staff or highly trained accountant or controller on staff, they can choose to perform the bookkeeping in-house (with training provided by ReliAscent®), while leaving monthly close, financial reporting, ICE Submissions, DCAA Audit support, indirect rates determinations, job cost reports, and other top level-work to our experts (note that ReliAscent® does not train third-party accountants, bookkeepers, or firms in this scenario).
Making QuickBooks DCAA Compliant
Bringing your QuickBooks file into DCAA compliance (via moving to our platform), requires adding several components to the general ledger and system as a whole. These can be found in the Federal Government's Standard Form 1408 (mentioned above), and they comprise the "pillars" or "foundations" of the platform. Think of this as a planetary system, in which your QuickBooks® general ledger (the planet), is properly formatted, and then "satellites"—from timekeeping to job cost reporting, invoicing methods, rates calculations, policies & procedures, and even how you run payroll—are all interconnected.
Though some platforms and accounting software may be more expensive than others, it is important to understand that the cost of setting up and operating a compliant system is recoverable from the government as part of the contractor's indirect billing rates.
Installation Questions, Cost, and Lead Time
Is your company a brand new start-up, or have you been in business for several years?
Are you backdating to January 1st of the current year, going back even further, or starting on a specific date?
What is the current condition of your books? Are there unresolved issues?
What gaps exist in your books and how long will it take to address each?
Once ReliAscent® determines your "road map to DCAA compliance," we then 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 costs between $1,000 - $5,000 depending on these 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, SpringAhead, GHG/ClockWise or TSheets
- 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 likes to see
- 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.
DCAA Accounting System FAQ's:
How much does it cost to setup a DCAA compliant accounting system?
Setting up a DCAA compliant QuickBooks accounting system on the cloud starts at $2,000. However, the price can increase to $3,000 - $5,000 depending on several factors (such as whether or not we need to back date to January 1 or another date, the state of your current accounting system, etc.). The setup process typically takes 2-3 weeks.
Is QuickBooks® Online DCAA Compliant?
Like the Desktop version of QuickBooks®, QuickBooks® Online can me made DCAA compliant through adding a number of supporting systems, properly setting up the Chart of Accounts (COA), installing a DCAA compliant timekeeping system, and implementing the proper policies and procedures.
However, QuickBooks® Online lacks many features that the Desktop version (Pro and Enterprise) have, and relies on a larger number of "satellite" systems and processes to be performed in order to ensure compliance. This makes compliant accounting with the Online version more complex, increases the chances of errors, and due to other limitations, does not make it a good option for growing government contractors and grantees (which is why most government contract accounting firms avoid QuickBooks® Online).
If your business currently uses QuickBooks® Online, ReliAscent® can easily migrate your data to our cloud-hosted, DCAA compliant QuickBooks® Enterprise platform during the system setup phase, in as little as two weeks, for as little as $2,000.
What if I haven't used an off-the-shelf accounting software for my business?
In this case, a small business needs help immediately (but the good news is that you are starting fresh, so the time and costs associated with set up are minimized). The following is a rough order of tasks needed to get your books up and running:
- Install a general ledger program (ReliAscent normally recommends QuickBooks®)
- Format a company template within the general ledger program to:
- Establish timekeeping practices meeting DCAA requirements (either manual or automated)
- Establish a third party payroll provider to meet government requirements
- Establish a way to do:
- Indirect Rate calculations on a regular basis (normally the government likes monthly)
- Provide for Subsidiary Job Cost Reports in a fashion that the government likes to see
- Establish policies and procedures
- Training to employees
What if I have QuickBooks® now but don't think it's DCAA compliant?
ReliAscent will review your current QuickBooks® file and in a cursory review, identify gaps in DCAA compliance that need to be fixed. These gaps typically fall under the major areas identified in the governments Form 1408. The next step is for ReliAscent to provide a quote to the company on how to fix this. This normally involves a one time up-front expense for the conversion of the QuickBooks® file and then a monthly charge going forward, for ReliAscent to help with compliance issues, invoicing, indirect rate calculations and management, creating subsidiary job cost reports, as well as other accounting functions.
Once the conversion method is selected, work can begin. The main tasks encountered in a conversion include:
- Restructuring the Chart of Accounts
- Setting up job cost accounting
- Setting up labor distribution
- Identifying direct costs to final cost objectives
- Identifying and isolating unallowable expenses
- Modified, memorized reports
- Syncing the general ledger to timekeeping, payroll, job cost, and the indirect rates systems, etc.
What if I have a different accounting software and don't think it's compliant?
Sometimes, a small business has a general ledger program already in use when they decide to start accepting work from the Federal Government. This software may be able to be made compliant (ReliAscent® has worked with several other general ledger programs in the past, making them compliant). Several steps should be reviewed prior to proceeding. This is a partial list of considerations prior to converting the platform to QuickBooks:
- Does the existing system have enough controls to do the basic GAAP and job cost accounting required by the government?
- Does the company expect to grow the Federal Government contracting in the future - would it make sense to consider changing to an accounting software that is fully compliant "out of the box"?
- What does the company use for timekeeping today? Does it meet DCAA requirements? If so, does it electronically integrate with the general ledger software program?
Many times it may be determined (in this evaluation), that it may be easier to simply convert to a QuickBooks® platform, since this is already proven, it's easier to convert, and easier to operate, due to the vast experience the ReliAscent team has.
Can I choose my DCAA compliant timekeeping system?
Yes! Part of the setup/migration process involves setting up an automated compliant timekeeping system. You can choose which system you prefer, but ReliAscent generally suggests Hour Timesheet for small businesses and startups looking to minimize costs. Other systems our clients typically use include QuickBooks Time, SpringAhead, and GoClockwise.
Does ReliAscent setup a 3rd party payroll?
Yes. One of the requirements of a compliant system is a third party payroll provider (you cannot run payroll out of Intuit). While most clients prefer Paychex (for pricing reasons), they also have the option of using ADP, Gusto, or any local payroll provider they choose.
Setting up your QuickBooks is just the first step; once it is brought into compliance, it must remain in compliance (and this requires the help of experts). Unfortunately, government contract, job cost accounting differs substantially from the commercial bookkeeping and accounting that a traditional bookkeeper or CPA is familiar with. While companies with existing accounting personnel on staff can sometimes be trained to handle the day to day bookkeeping and administrative tasks required, performing the month-end closes, calculating indirect rates, and the necessary financial reporting required, is best left to our staff. To learn more about our outsourced DCAA bookkeeping & accounting services, click here now, or contact us at any time.