DCAA Compliant Accounting Systems
Does The DCAA Approve My Accounting System?
Small Businesses competing for cost type (and many T&M) contracts from the Department of Defense, NASA, the Department of Homeland Security (and other agencies), must have an accounting system that is compliant with the Federal Acquisition Regulation (FAR), and the Defense Contract Audit Agency (DCAA). The 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.
Many small businesses are confused when first entering the government contracting world, and often ask, "how do I get the DCAA to approve my system?" Perhaps one of the most important concepts to understand is that the term "DCAA approved accounting system" is a misnomer. There is, in fact, no such thing as a "DCAA approved" system, nor does DCAA certify your system. There are merely accounting systems that are compliant with FAR & DCAA requirements and compliant software that is designed to pass the accounting system audit.
DCAA Compliant Accounting System Requirements
In order to be DCAA compliant, a contractor's accounting system must meet the following conditions:
- The Accounting system must be setup and maintained in accordance with Generally Accepted Accounting Principles (GAAP).
- The system must properly segregate direct and indirect costs.
- Costs must be accumulated by cost element and by project. For every direct cost transaction, a job or project number must be assigned.
- Accumulation of all costs must be under general ledger control.
- Monthly reconciliation of direct and indirect costs in the general ledger.
- A compliant timekeeping system that identifies employee labor by cost objective.
- A compliant labor distribution system that charges direct and indirect labor to appropriate cost objectives.
- Monthly determination and recording of costs.
- Exclusion and tracking of unallowable costs.
- Identification of costs by CLIN (contract line item).
- Segregation of pre-contract/award costs from contract costs.
- The system provides the necessary financial information to demonstrate compliance with the Limitation of Funds clause and to support progress payments.
To learn more about the components of a compliant system, download our helpful white paper: "A Quick Guide to the DCAA Compliant Accounting System - Understanding the SF1408," now. This useful guide provides you with an easy to understand summary of each of the DCAA's requirements for your 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 compliant system, 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. In general, clients have 3 options:
Cloud-Hosted, DCAA Compliant QuickBooks® System
Our most popular option is to set up a new system on—or migrate your existing accounting system over to— ReliAscent's Compliant QuickBooks® Enterprise System (hosted on Amazon's GovCloud™). Once the setup is complete, clients can choose to outsource their monthly accounting to ReliAscent, or perform the bookkeeping in-house, and leave monthly closes, ICE Submissions, and DCAA Audit support to our experts (only recommended for companies with previous DCAA accounting experience). To learn more about our outsourced government contract accounting services, visit our DCAA Accounting & Bookkeeping Services page.
Setting Up the System on your own Servers
If your business has an existing accounting system, and you would like to keep it hosted locally, ReliAscent can properly format the general ledger and set up the appropriate supporting systems to meet DCAA and FAR requirements (ReliAscent® recommends small businesses use the desktop version of QuickBooks®, as it is the most user-friendly and affordable system, and does not lack many critical components required for compliance, like the Online version). This option is generally only recommended for larger companies with previous government contract accounting and FAR / DCAA compliance experience.
Accounting for SBIR/STTR Ph I Awardees
If a small business only has a single Ph I SBIR, or a contract or grant through an Agency like the NSF, NIH, or DoE (which does not require a DCAA compliant system), ReliAscent offers our Ph I Foundation Packages™. The package consists of an accounting manual, timekeeping procedure, example timecard, and a QuickBooks® Desktop General Ledger & Chart of Accounts template (compliant with awarding agency requirements). Once the installed, the business has a system which is compliant with the agency and FAR requirements, and which serves as a "foundation" for the required system needed in an SBIR Ph II, or when a fully DCAA compliant system is required for any other reason. This system can then be more smoothly migrated to our cloud-based system when needed.
Bringing Your System into Compliance
Bringing your accounting system into compliance requires adding a number of components to the general ledger and system as a whole. These components can be found in the Federal Government's Standard Form 1408 (mentioned above), and they comprise the "pillars" or "foundations" of the system. Think of this as a planetary system, in which your QuickBooks® general ledger (the planet), is properly formatted, and then "satellite" systems—from your compliant timekeeping system, to job cost reporting, invoicing methods, rates calculations, policies and procedures, and even how you run payroll—all are interconnected.
Though some systems and software may be more expensive than others, it is important to understand that the cost of setting up and operating a compliant accounting system is recoverable from the government as part of the contractors indirect billing rates.
Just as there are different types and sizes of contractors, each small business has their own unique circumstances. As a result, the process of setting up your accounting system will either involve a conversion of your existing accounting system, or an installation of a new, (typically QuickBooks-based) DCAA compliant accounting system (either on your own servers/cloud, or ReliAscent's cloud-hosted QuickBooks Enterprise system).
Installation / Conversion Costs and Lead Time
- 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 accounting system? Are there unresolved issues?
- What gaps exist in your accounting system, and how long will it take to address each?
Once our experts have a better sense of your "road map to DCAA compliance," we can provide your small business with a quote and expected lead time for bringing your system into compliance, or installing your new system. As we've discussed, the steps involved can differ depending on your specific circumstances, but the following is a rough order of tasks in order to get a system up and running:
- Install a general ledger program (ReliAscent® normally recommends a desktop version of QuickBooks®), or bring your current general ledger system 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 compliant accounting
- Establish a DCAA compliant timekeeping system (either manual or automated) - we recommend SpringAhead, GHG/ClockWise or TSheets
- Establish a payroll system compliant with government requirements
- Establish a method to perform:
- Indirect Rate calculations on a regular basis (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 JE's, etc.)
For more information on the individual requirements/components of a DCAA compliant accounting system, download our popular white paper: "A Quick Guide to the DCAA Compliant Accounting System - Understanding the SF 1408."
Setting up the system is just the first step. Once the system is brought into compliance, it must remain in compliance throughout the duration of the contract. Unfortunately, DCAA compliant accounting differs substantially from the commercial bookkeeping and accounting that a traditional bookkeeper or CPA is familiar with. Maintaining compliance, and thus, performing critical functions like the monthly close and indirect rates calculations, requires an accountant or firm with extensive experience in government contract accounting.
ReliAscent® is unique in the government contract accounting industry. We offer multiple levels of outsourced accounting services to contractors and grantees—each tailored to their business and compliance needs—in addition to contract management, and business & financial management services (all under one roof). We have over 200 years of collective experience in government accounting, contract & grant management, and business consulting services, and provide a complete "solution," found nowhere else in our industry. At ReliAscent, our goal is not to sell you a software package and let you fend for yourself, or to simply perform the bare minimum required to pass an audit. We want to see you succeed and focus on what you do best, and that takes more than just an accounting firm.