Defense Contract Audit Agency (DCAA)
The Defense Contract Audit Agency (or DCAA), is a group within the Department of Defense (the largest budget within the Federal Government) responsible for auditing contractors. Their primary guide in these audits is the FAR and the DCAA Contract Audit Manual (DCAM).
There are many different audits they are responsible for, including everything from pricing proposals, to incurred cost proposals, to full system audits. The risk of audit is up to the government, and is usually determined by a combination of the contract type, size of award, and apparent financial risk. The DCAA does do some work at the request of other agencies, but their primary responsibility is auditing contracts and financial systems/reports of contractors supplying to the Department of Defense. According to FAR requirements, they will have full access to a contractors records in order to verify that the US Taxpayer is getting value for the money they spend.
So, what does the DCAA do for you?
As a tax payer, their charge is to save you money (or at least make sure that the money that is allocated to be spent on contracts in the DoD is spent correctly). As a contractor, they are there to ensure that you are managing your contract correctly with respect to costs. The DCAA is the compliance checker for all things related to your contract. So, they are not just concerned with the bottom line, but they are also concerned with whether or not you are following general course of law as you work with the government.
There are over 580 FAR clauses that the DCAA is charged to know what is applicable to your organization, what compliance to each of these clauses mean, and whether you are compliant. They are also very interested in your accounting practices, purchasing system, inventory management system, how you care for your product, and how you treat your employees. All of these things add up to real and/or potential costs to the government, thus the need for the DCAA, and DCAA audits.
The DCAA and Your Small Business
When a small business is selected for an award that requires a DCAA compliant system, there are a number of reviews, audits, and accounting system requirements that company must meet, including:
- A Financial Capability Review - The Federal Government needs to be certain that a contractor can complete the contract. That means the contractor must have the necessary resources to purchase any needed inventory or equipment, and it must be financially stable.
- They may even request financial statements and forecasts as well as detailed information about your debts and other outstanding obligations. The DCAA auditor's role is to ensure properly prepared, complete and accurate information, will give the contracting officer (CO) a clear picture of your finances when evaluating your bid/proposal.
The Pre-Award Accounting System Audit
The DCAA will also evaluate your accounting system to ensure it meets all applicable regulations. When it comes to cost type contracts, this audit is especially important because the government must ensure it is only billed for allowable costs. However, you must maintain a compliant accounting system regardless of the type of contract you are seeking.
The DCAA performs this initial review of your accounting systems during the Pre-Award Accounting System Survey. If the DCAA accepts your bid, it will also monitor your continued compliance with government accounting standards.
Other than accuracy, the main purpose of FAR and DCAA accounting regulations is to ensure properly segregated costs. A contractor must separate the costs of their government contracts from commercial contracts. Further, if a contractor has multiple government contracts, they must allocate costs to each contract, and the indirect and direct costs, and allowable and unallowable costs must be properly segregated. The DCAA Manual (DCAM) provides the general framework for a contractor’s accounting system.
The FAR outlines which costs may be billed to a contract, and each contract will also further clarify what costs are allowable or unallowable. There are three types of costs that can potentially be allocated to a government contract:
- Costs that are incurred specifically for the contract
- Costs that are incurred for both the contract and other work that can be reasonably divided between them
- Costs that are necessary to maintain the business's operations that do not have a direct relationship to specific work
Reporting to the DCAA
A contractor’s obligation to report these costs and other information will depend on the terms of your contract. Be sure to perform a contract review after each contract is awarded, and contact ReliAscent if you have any questions regarding specific FAR clauses and other requirements, and how that affects your accounting system, and how you manage your contract and rates.
At minimum, you must generate an internal interim report of the costs to be assigned to a contract at least Contractors also must reconcile their accounts and make necessary adjustments to their cost allocations. If a contract calls for progress updates or identification of costs by line item, these must be appropriately reported.
The DCAA will review your accounting records to check that costs are properly allocated as allowed. It also verifies your cost reports against your general ledger to determine whether the costs were actually incurred.
Does DCAA Approve My Software or Accounting Firm?
One of the most frequent questions we get from new contractors is, "is your accounting system DCAA approved, or are you a DCAA approved accounting firm?" The answer often surprises small businesses: DCAA does not approve specific accounting firms or software as DCAA compliant. Rather, the DCAA makes a determination of your system's compliance on a contractor by contractor basis.
Maintaining DCAA compliance is extremely tedious, complex, and difficult, and beyond these audits, the DCAA also audits timekeeping and performs timekeeping unannounced floor checks to government contractors.
Most firms here the word ‘audit’ and cringe, but if you have a compliant system, there is no reason to fear. The DCAA is charged to ensure that you are managing your contract correctly, so having a DCAA compliant accounting firm like ReliAscent handle this task for you, can allow you to focus on your direct work, and be comfortable with the knowledge that your system is compliant, and you have the backing of not just an accounting firm, but a fully outsourced government contract compliance firm.
If you don't know whether your system is compliant or not, contact ReliAscent today about our compliance review offerings.