DCAA Compliance Blog

Government Contracting News and DCAA Information for Contractors

ReliAscent LLC specializes in FAR compliance, DCAA compliant accounting, and government contract management/administration for Federal Government contractors and grantees.  In our DCAA Blog, we discuss the latest government contracting news from the Federal Government, the DCAA, and DCMA.

While the best way to maintain compliance with government requirements is to hire our experts, we hope our blog gives you some valuable insight into this complex environment.

We hope you will visit and take part in the discussions on our blog on a regular basis. If you ever have any questions or would like to discuss how our experts can help, do not hesitate to contact us at any time!  

To browse our extensive library by topic, use the form to your left and search by tags.

DCAA Compliance & Accounting Services

Government Contracting 101 - Part 7: How does the government pay for my research?

Posted by Brian Ormsby on Thu, May 18, 2017 @ 09:28 AM

There are several ways that the government can help fund your research.  The first is through a direct need from the government and direct funding under a grant or contract written specifically for research and/or development.  There are many avenues to assist in this type of funding.  FAR Part 35 discusses Research and Development Contracting.  There are also several programs designed for small businesses that we discussed earlier in this blog series in “Blog 4 – What is the role of small business in Government Contracting?”.   These programs include the Small Business Innovative Research (SBIR), Small Business Technology Transfer (STTR) and Federal and State Technology Partnership (FAST) programs designed specifically for this purpose.  There are also solicitations in the Broad Area Announcements (BAA) for fulfilling government needs and desires for developing new products and technologies.

The government will also indirectly fund contractor research and development efforts under the Independent Research and Development (IR&D) costs pool for almost any government contract, whether it is for R&D or not.  IR&D is a General and Administrative (G&A) costs sub-pool.  IR&D is defined in the FAR as follows:

Per FAR Part 31.001 – “Independent research and development (IR&D) cost” – means the costs of effort which is neither sponsored by a grant nor required in performing a contract, and which falls within any of the following four areas:

  • Basic research
  • Applied research
  • Development, and
  • Systems and other concept formulation studies.

How do you know if you are performing an authorized IR&D function?  Per FAR Part 31.205.18 – IR&D costs are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable.  In order for IR&D costs to be allocable, you just have to have an accounting system that is compliant so that IR&D is allocated equally amongst your programs. 

What is the definition of reasonable?  There is some subjective determination on the reasonableness of IR&D costs.  Here are a few rules of thumb:

  • You have some expertise in the area of research. In other words, you aren’t an ASE certified mechanic trying to solve the problems of nuclear waste.
  • You have justification for the costs:
    • Timekeeping to document the amount of efforts
    • Backup documentation for purchasing
    • Statements of Work for Subcontracts
    • Statements of Work for Consultants
  • You have a defined goal that your research is going to achieve
  • You have set measurement criteria for the research to determine if you are advancing

In short, IR&D topics need to be run like any other contract; it is just an internal contract with yourself.  If you are performing any experiment and you don’t have criteria for success or results of measurements, then you aren’t doing research, you are just playing!  The government is not interested in paying for follies of fancy (they want to fund real research, independent or not).

If you have questions about setting up and IR&D project, please contact ReliAscent (303) 999-3802.  We can help you ensure that you are advancing your corporate intellectual property and you can be assured that the costs of that effort will not be disallowed by an auditor in the future.

- Brian Ormsby, ReliAscent

 

 

Topics: Government funding, R&D Funding, Government Funded Research, Getting the Government to Fund Your Research

Government Contracting 101 - Part 6: Agency Differences in Unallowable Costs

Posted by Brian Ormsby on Tue, May 09, 2017 @ 09:05 AM

In the world of Government contracting, the government defines an allowable cost as a cost that they will pay either in full (direct costs) or an allowable portion (allowable indirect costs) of that cost.  An unallowable cost is one that the government has stated that they will not reimburse the contractor for the expense.   All agencies start with the Federal Acquisition Regulation (FAR) Part 31.201-6 to define unallowable costs and discusses how to account for unallowable costs.  FAR Part 31.205 discusses specific costs and discusses whether they are allowed or not (it is not an all-inclusive list, however it is fairly comprehensive).  Each agency can add to this list, however, with agency specific guidelines.   For instance, there are Defense Federal Acquisition Requirements Supplements (DFARS), Department of Energy Acquisition Regulation Supplement (DEARS) as well as similar guidelines for other agencies.  In addition, there are differences in requirements between contracts and grants.  There is further delineation between awards to “For-Profit Organizations” as opposed to “Non-Profit Organizations” or “Educational Institutions” or “State, Local &/or Indian Tribe Governments”.   Here are some examples of other agency restrictions for “For-Profit” Organizations (not all inclusive):

National Institute of Health (NIH) (48 CFR 74.27)

  • All FAR unallowables
  • Limitation on Salary, anything over is unallowable
  • Independent Research and Development (IR&D)
  • Sales and Marketing
  • Business Development, Commercialization costs

National Science Foundation (NSF) (48 CFR 31.201-6 – Contracts & 2 CFR 215.27 - Grants)

  • All FAR unallowables
  • All Patent Costs
  • IR&D
  • Sales and Marketing
  • Business Development

Department of Energy (DOE) (10 CFR 600.317)

  • All FAR unallowables (FAR Part 31)
  • All Patent costs (Phase I SBIR only – Patent prosecution costs for all funding)
  • Foreign Travel

Regardless of which agency you deal with, you must make sure that all the unallowable costs are not billed to the government.  How do you ensure that unallowable costs aren’t billed to the government?  First of all, you must segregate your unallowable costs under general ledger control in your accounting system. You must ensure that all unallowable costs are input into this section and that these costs don’t end up in your direct or your indirect costs that are billed to the government.  When a contractor is dealing with multiple government agencies, this can be a bit tricky as some costs that are unallowable for one agency could be an allowable cost for another agency. 

It is imperative that you handle your unallowable costs correctly.  If you are audited and unallowable costs are found to be in you allowable areas (direct or indirect), they will be disallowed and you will end up owing the government money.  That is not the only implication, generally, your accounting system will also fail the audit based on this finding and you may be debarred from any future Federal Government contracts.

If you have questions about unallowable costs, how to handle them in your accounting system and anything else concerning unallowables, please contact ReliAscent (303) 999-3802.

- Brian Ormsby, ReliAscent

 

 

Topics: Unallowable Cost, DCAA Unallowable cost, unallowable costs

Energy Secretary Rick Perry Halts DoE SBIR/STTR  2017 Ph I Selections Until Further Notice

Posted by Tyler Link on Thu, May 04, 2017 @ 12:52 PM

The Department of Energy’s SBIR/STTR Programs Office just released an important notice to all 2017 DoE SBIR/STTR applicants, that is sure to disappoint a lot of people.

In a recent email sent out to all applicants, the DoE states:

“Our Office was scheduled to issue award notifications for our FY 2017 SBIR/STTR Phase I Release 2 Funding Opportunity on Monday, May 1, 2017.  New DoE Administration officials requested that SBIR/STTR selections be held until Secretary Perry has an opportunity to be briefed on research projects that will take place under his administration.  Award notifications will therefore be delayed until that review has taken place.  At this time, our office has not been provided with a time frame for completion of that review. We will provide periodic updates as more information becomes available.”

We hope that Secretary Perry’s review does not hold up selections for months (or possibly over a year), but the fact that he actively called for the Department of Energy to be abolished for years, and only just announced that he "regretted those remarks" this January, may have a lot of people of very worried…

The “silver lining” in this is that the Department of Energy SBIR funding has been roughly $217M per year (2016 spending increased a little to $228M) distributed over approximately 300 awards per year.   As long as the Department of Energy has an Extramural R&D budget, they must allocate 3.2% of that budget to the SBIR program and 0.45% of that budget to the STTR program.  With the emphasis on renewable energy sources, especially the large Renewable Energy Lab in Golden, CO, it doesn’t look like this will total disappear in the near future. 

Stay tuned: ReliAscent will update our Blog with updates, as we get them.

 

Topics: DoE SBIR 2017, DoE STTR 2017, Rick Perry halts DoE SBIR/STTR Selections

Protecting Your Business with Government Contract Reviews

Posted by Tyler Link on Fri, Apr 28, 2017 @ 09:30 AM

One of the most thrilling parts of being a small business government contractor, is being awarded a contract.  You’ve poured your time, money, and possibly even a large portion of your professional life to get to this point, so what is the most natural reaction of a contractor or grantee when they receive an award/contract?

Well really, most companies are so thrilled that many will simply want to sign it and get the ball rolling.  The main goal is to start work and eventually start receiving money for the work performed.  After all, that is the whole reason that you wrote the proposal in the first place! 

But what happens when the average small business is handed a contract with dozens to hundreds of pages? Just like your standard Apple iTunes agreement, or the typical mortgage loan package, how many people actually read every page and all the fine print, understand every condition, and are fully aware of exactly what they are signing up for?

Not many…and when your business is accepting a contract from the Federal Government, not knowing the critical details and processes of each element of the contract can spell disaster for any contractor.

This is why it is critical that small businesses perform a thorough government contract review of each and every award. Whether you are comfortable enough to perform this task in-house, or you contract this out to a government contract management and DCMA/DCAA expert like ReliAscent, is up to you. Our experts have over 150 years of contract review experience, and ReliAscent just released our latest white paper: “Government Contract Reviews – Protecting Your Company from Potential Disaster.”

No matter which option you choose, a proper, thorough contract review can mean the difference in staying profitable or losing money on a contract, and even the very future success of your company.

To learn more about ReliAscent’s Government Contract Review services (or any of our contract management or accounting services), please contact us at any time. 

Topics: government contract management, government contract reviews

Government Contracting 101 - Part 5: How Does The Government Make You Pay Your Fair Share of Your Indirect Costs?

Posted by Brian Ormsby on Wed, Apr 26, 2017 @ 11:00 AM

 In a cost reimbursable job, we all know how the government will pay for direct labor and materials.  In these awards, they also pay for a “fair share” of your overhead (or indirect costs).  How does the government determine, and pay for, their “fair share” of your indirect costs?

Let’s start with the basics: when you bid on a contract, you figure out how much it is going to take (cost) to make the program work.  You add all your labor hours, materials, equipment, travel, etc.  These expenses are exclusive to this effort and therefore called “direct expenses”.  These costs can only benefit this one contract or, as the government calls it, a "final cost objective."  There is, however, a lot more that goes into running your business.  You have accounting costs, administration costs, printers, electricity, rent, etc.  These are called indirect costs because they benefit more than one final cost objective.  Where are these costs captured?  More importantly, how does the government determine what their “fair share” of these costs are?

The government determines their fair share by having the contractor calculate Indirect Billing Rates.    From a 30,000-foot level, these are complex calculations, determined by regulation, to allow the government to reimburse the contractor some portion of their overhead expenses.  In our next Blog Topic ‘What is an Indirect Rate?  Why would you have more than 1?’, we will go into the definition of indirect rates and how they are calculated.   This blog, however, is an introduction into the concepts of why we have indirect billing rates.

It is easy to take direct costs that you know you will need to run a program and add them up.  The non-direct or indirect costs can get a little more complicated.  If you have only one program and no other activity, then it would be easy; all your allowable indirect costs would go against your one and only program.  In this scenario, the government would know precisely that they were paying their fair share of your indirect costs because all your indirect costs would be the fair amount (since all efforts of the company support only one job).  But what if you have two, three or ten programs going? What if some of these jobs are commercial in nature?  How does the government determine what is fair from one program to another? 

The only way to do it would be to divide the indirect expenses by a fair, equitable determination of direct expenses in a way that creates a ratio that can be applied back to each program.  This denominator in the ratio is commonly called the “base”.  This process spreads all the indirect costs back into all the programs in a manner that is proportionate to the magnitude of each program, thus providing a fair share of indirect costs for each program.  If this is done correctly, the government can look at any of your programs and determine that the fair share of indirect costs is allocated to each and every program.  This can be a simple one rate structure for a small company (covering all indirect expenses) to a multiple rate system for larger companies, with rates for overhead, G&A, Materials & Subcontracting, On-site, Off-site and other potentially complicating evaluations. 

To follow the logic of the previous paragraph, we have created an example based on a one rate structure, using total direct costs as the basis of calculation and a total company indirect amount of $1,200,000.

  Project 1 Project 2 Project 3 Project 4 Company Total
Total Direct Costs $750,000 $200,000 $150,000 $500,000 $1,600,000
           
Indirect Applied $562,000 $150,000 $112,500 $375,000 $1,200,000
Indirect Rate 75.00% 75.00% 75.00% 75.00% 75.00%
           
Total Contract Cost $1,312,500 $350,000 $262,500 $875,000 $2,800,000


Using the example above, you can take any one of the projects and quickly see that project is assigned its fair share of the total company indirect costs.  So if Project 1 was commercial, Project 2 was a Government Agency A contract, Project 3 was a Government Agency B grant, and Project 4 was a Government Agency C contract, each agency would be able to view and verify that they were being assigned only their fair share of your total indirect costs.

Depending on the agency, there can be several checks that are instituted in your rating system.  Some agencies only allow you to rate current year using last year’s rates, some required forecast budgets to establish a provisional rate and then an end of year rate based on actuals to make adjustments.  Regardless of the system, each agency is attempting to ensure that they are paying the correct amount of indirect expenses that is fair to their contract and only their contract.

Of course, this is just a very simple example.  Most companies will have a more complex set of calculations where the base of the indirect rates is governed by many different regulations.  There are even some overhead expenses (and direct expenses) that are what the government deems “unallowable”.  The government will not reimburse for unallowable expenses of any kind (we will discuss unallowable costs in future blogs, and ReliAscent does have white papers on the subject as well---visit our White Papers and Checklists page for more information).

- Brian Ormsby, ReliAscent

 

 

 

Topics: Indirect Cost, indirect costs

Government Contracting 101 - Part 4: What is the Role of Small Business in New Product Development?

Posted by Brian Ormsby on Tue, Apr 18, 2017 @ 11:08 AM

Small businesses are the cornerstone of innovation in the US Government, and  Federal Acquisition Regulation (FAR) Part 19 discusses Small Business Programs.  It sets the size standards to be considered a small business, and it also sets the policies, coordination with the Small Business Administration (SBA), Small Business Set-Asides, subcontracting with small businesses, description of special categories of small business, etc.

Small businesses are on the leading edge of innovation.  In fact, small businesses invent at a rate faster than large businesses. In a patent study[1], it was found that the smaller the company, the greater the number of patents per employee.  This was found to be true all along the scale; as businesses grow, their patent to employee ratio declines.  Small business accounts for 8% of all patents issued, but 24% of all patents in emerging technologies.  The government is interested in emerging technologies as that is how they keep their competitive edge.

Because of this, and other factors, Congress has mandated that small businesses receive 23% of all Federal Government contracting dollars, including 5% of prime and subcontracts to Small Disadvantaged Businesses; 5% of prime and subcontracts to Women-Owned Small Businesses; 3% of prime and subcontracts to HUBZone Small Businesses; and 3% of prime and subcontracts to Service-Disabled Veteran-Owned Small Businesses.

There are some very specific programs designed to enhance the role of small business in government contracting.  Here are a few of the major key programs:

Small Business Innovative Research (SBIR) Program

The SBIR program was established within the National Science Foundation in 1976 with the first awards issued in 1977.   The program was well received and further established in 11 different agencies with the SBIR Development act of 1982. It is designed to enhance the role of small businesses in research and development that has potential for commercialization.  The program has not only generated significant innovation in the country but also been recognized as a significant driver in overall job growth in the United States over the last 30 years.  The non-dillutive funds have helped many small businesses succeed where they might have otherwise failed early on.  Two large success stories from the SBIR program funding are Symantec and Qualcomm.  

The SBIR program currently mandates the 11 agencies set aside 3.2% of their R&D budgets for the program.  In 2016 this translated into 3,029 awards for a total of $1.35 Billion.  The US Small Business Administration (SBA) serves as the coordinating agency for the SBIR program.

Small Business Technology Transfer (STTR) Act

Modeled after the SBIR program, STTR was established in 1992.  The goal of the STTR program is to facilitate the transfer of technology developed by a research institution through the entrepreneurship of a small business concern.  The program accepts proposals where small businesses partner with universities or research institutes.  There are several qualifiers to this program as to the percentage of work performed, employment of the Principle Investigator, etc.  In 2016 there were 567 awards for a total of $192 Million.

Federal and State Technology Partnership (FAST) Program

FAST programs are competitive grants programs designed to strengthen the technological competitiveness of small businesses.  These funds are issues from the Federal Government to the state level where the program is managed.

The emphasis on using small business concerns doesn’t stop at the SBIR/STTR level.  There are several other ways that small businesses can get involved in government contracting.  Some contracts are set up specifically for small businesses (we will discuss these opportunities for small business in a special blog near the end of this series).

Federal contracting with small businesses is a win-win.  Small businesses get the revenue they need to grow their businesses and create jobs, and the Federal Government gets the opportunity to work with some of America’s most innovative and nimble small businesses, often times with a direct line to the CEO.

 - Brian Ormsby, ReliAscent

[1] Patent Trends among Small and Large Innovative Firms during the 2007-2009 Recession, Anthony Breitzman, PhD.  May 2013.

 

 

 

Topics: government contracting, Small Business, new product development

Do You Know When To Change a Contract? Or How?

Posted by Tyler Link on Fri, Apr 14, 2017 @ 09:30 AM

Sometimes, we find that our clients (and government contractors in general), can get so focused on their direct work that contract management/administration is an afterthought.  We also see this in relation to accounting & DCAA compliance (but that is a different, yet related, topic).  When contractors overlook how they manage their contract(s), they are setting themselves up for potential problems including scope creep or changes in the market place that can completely wipe out their profits. 

To see if you are at risk of this same problem, ask yourself if the following sounds familiar:

  • Have you ever found yourself in a position where you bid a contract and won the award, but then got into the performance phase to find out that a critical item or service was severely underbid?
  • Or, what if the deliverables or scope of work expected by the Federal Government changed over your period of performance, without equitable changes in the compensation of the contract, running up your costs and destroying your profit?

Is there a way to remedy the situation and become profitable again? Absolutely: file a thorough and well-drafted Government Contract Change Order

In situations like these, many small business contractors don’t realize that a contract change order can mean the difference between staying profitable, and potentially losing thousands, to even millions of dollars on a contract.

What’s more important; you only have one crack at a proper change order, so getting this right from the start, is absolutely critical to contractors.

At ReliAscent, our DCMA and contract management experts have over 150 years of Federal Government contract management experience, and have helped hundreds of clients complete successful contract change orders.  If you would like to learn more about out contract management services and how contract change orders may help your business, download our popular white paper “Government Contract Change Orders 101,” or contact our experts today. We are always happy to help!

Topics: contract management, dcma compliance, contract change orders

Government Contracting 101 - Part 3: Can Deferring Wages Get Me Into Trouble?

Posted by Brian Ormsby on Wed, Apr 12, 2017 @ 11:02 AM

Let’s start with the definition of deferred wages – any arrangement where an employee receives wages after they have earned them.

There are rules concerning deferred compensation, both on the government contract accounting side, and on the Internal Revenue Service (IRS) side.  Be sure that you research both sides of the equation prior to entering into an agreement to defer compensation (whether you are the employer or the employee).

Let’s first talk about the IRS implications.  Here at ReliAscent, we are not tax accountants, so please do your research and ask your tax preparer before you enter into any deferred compensation agreement.  However, under the IRS code there are two types of deferred compensation, qualified and unqualified.  Qualified deferred compensation isn’t what we are talking about in this blog. In fact, most companies participate in qualified deferred plans, such as a retirement plan under the 401k rules.  Unqualified deferred compensation is the issue that this blog is discussing.  The IRS offers some rules (see IRC Section 409A) concerning unqualified deferred compensation that are very important.  The big one is that employees must pay taxes on deferred compensation at the time such compensation is eligible to be received, not when it is eventually paid.  There is a caveat with the IRS, as they don’t seem to care unless you are deferring compensation from one tax year to another. That is when this rule actually “kicks in”.  Please consult your tax advisor to ensure that you are following the IRS rules when deferring compensation.

Now let’s switch to government contract concerns (DCAA, NSF, NIH, DOE, etc.).  The government expects to pay the contractor for expenses that have already occurred or will occur within the next 30 days (FAR 32.504(b)).  If you are reporting time on an employee’s timecard against a project, use that information to bill the government, receive that money, but if you are deferring the wages, you may have just committed fraud.  The following three examples are where you may defer wages without getting into trouble:

  1. If you are only deferring the wages for a short period of time, like deferring the mid month amount to be paid at the end of month then you should be okay.
  2. If you are deferring wages and not billing the government for the deferred wages, then you are also okay. (But then, what’s the point!)
  3. If you are deferring wages and the employee fills in their timecard and then agrees not to take any or part of their wage, the unpaid part is credited to deferred wages liability and the wages are paid prior to contract close you are okay with the contracting agency or DCAA. However in this example, you may have problems with the IRS if you extend the deferral past the end of your fiscal year without paying the tax obligation for the deferral.

Normally, wages are deferred in order to make up for cash-flow shortages.  However, if you choose to defer wages you must be careful to know the ‘rules of the road’ with the DCAA and IRS.  If you get this wrong, you will owe that money back to the government agency and can be penalized by the IRS.  To get the government contracting rules on deferral, contact Brian Ormsby at ReliAscent (303) 999-3813.

 - Brian Ormsby, ReliAscent

Topics: Deferred Wages

Special Guest Blog: "Staying up to date with Leave Policies" - Clockwise Timekeeping Software

Posted by Sade Joseph on Thu, Apr 06, 2017 @ 10:46 AM

The topic of leave is a prevailing trend regarding work-force policies. The momentum continues to build as we transition into a new administration and see changing laws and employee expectations. It is possible we will see a shift in more companies introducing paid family leave, a shift from accrued vacation and sick to PTO (paid time off), and a shift to remote/ telecommuting work options vs. the traditional office based position.

When establishing a time and attendance tracking system, Clockwise always asks for your current data such as: employees, jobs, overtime and leave policies. These rules are built into the software to best serve your current needs. However, as company policies change like new accrual rates or rollover amounts, settings will need to be adjusted also.

Sometimes it is not caught for months but at this point, there will be data cleanup needed. To help avoid this pitfall, we recommend that a data and policy review happen at least once a year if not every 6 months. By taking the few extra minutes to check settings and procedures, you ensure less clean up down the road.

Tips to avoid complications:

  • Stay up to date on federal, state, and county/city laws. Currently, private sector employers with 50 or more staff members, public agencies, and public/private elementary and secondary schools are required to provide covered employees job-protected  with up to 12 workweeks of unpaid leave for qualified medical and family reasons.
  • Plan ahead by putting it on your calendar to review leave policies every 6 months or note or question policy changes at company planning meetings.
  • If any changes arise in leave policy, make sure to contact a representative from your time and attendance software.
  • If leave policy changes are needed, make sure to notify all parties that are affected.  

The increasing complexity of federal, state and local leave laws, combined with changing employment trends makes it critically important for employers to utilize these steps and review their leave policies and procedures frequently. In addition to achieving legal compliance, annual reviews should seek to ensure consistency among the range of handbook policies governing leave, accommodation, paid time off, attendance, disability, fitness for duty, light duty, drug testing, physical agility testing, medical examinations, wellness programs and related matters. 

For more information on Clockwise time and attendance solutions, and industry standards, be sure to visit www.goclockwise.com.

 

 

Topics: IP Rights, IP Strategy, Software Copyrights

Government Contracting 101 - Part 2: Who is the DCAA, and What is DCAA Compliance?

Posted by Brian Ormsby on Thu, Mar 30, 2017 @ 11:05 AM

The Defense Contract Audit Agency (DCAA) was founded in 1965 under Robert McNamara, the Secretary of Defense from 1961 to 1968.  Its function is to perform all contract audits for the Department of Defense.  Prior to 1965, each U.S. Military branch had separate contract audit functions and regulations. 

However, contractors and government personnel recognized the need for consistency.  In May 1962, Robert McNamara instituted “Project 60,” to examine whether it was feasible to centrally manage contract administration and audit services.  The outcome of the study was the decision to establish the DCAA (and the DCAA began operations on July 1st, 1965).

The DCAA performs many different types of audits, but for the newcomers to the industry, the first contact with the DCAA is to perform an audit prior to an award of a cost type contract.  This is called a “pre-award audit.”  This audit is an overview look at your accounting system to ensure that you have the correct pieces in place to manage the government’s money.  The DCAA provides you with a checklist of everything that you need to pass this audit.  In fact, the entire DCAA “play book” is available on their website for everyone to review, study and memorize.  This is called the DCAA Contract Audit Manual (CAM), and is how all audit activities within the DCAA are performed. You will also hear it called the DCAM.  They have a shorter version (CliffsNotes™ if you will), called the Audit Process Overview, which includes the “Information for Contractors” which is an invaluable guide for a company facing a DCAA audit.  The Audit Process Overview contains links and introductory information on the government auditing process and specific information for small business contractors.

The term “DCAA compliance” is terminology that is commonly used and means that a system is adhering to the regulatory guidance that the DCAA uses.  These regulations are the Federal Acquisition Regulations (FAR), Defense Federal Acquisition Regulations Supplement (DFARS), and Generally Accepted Accounting Principles (GAAP) as well as the guidelines outlined in the DCAM. To insure compliance with these regulations, the DCAA performs many different types of audits and checks.

For example: the DCAA performs “Floor Checks” on timekeeping systems.  These are unannounced, site-visit checks of your timekeeping practices.  The DCAA also audits your timekeeping system for compliance.  What they are looking for is a system that provides the following (they review these items during a floor check as well):

  • Employees track and record their time at least daily
  • Employees track time to a specific cost objectives and into the appropriate indirect pools, including holiday, sick and vacation
  • Employees track all their time, accurately (and preferably to the ¼ hour)
  • There is a way to track changes to time cards
  • Only the employee is annotating their own time
  • Employees are issued pre-populated timecards
  • There is supervisory control and approval
  • Your accounting system has a way to record or download these timesheets
  • Your accounting system has a way to handle overtime, compensated or uncompensated.

The DCAA may also be auditing your accounting system, depending on the risk assessment done by the Contracting Officer (CO).  They are looking for GAAP-based accounting, and to see that all your accounts and pools are under general ledger control, including your contracts/grants.  They also want to see if you properly segregate direct and indirect costs, and whether you can identify accumulated direct costs by the contract/grant.  There should be a way to segregate what the FAR terms “Unallowable” costs so that they will not be billed to the government. They will want to see if you have a system to close your books monthly, calculate your indirect rates and prepare accurate costs per your predetermined rate structure.  Further, they will want to know if your system provides the ability to limit costs based on contract limitations (total price, fee, rates)? They will be looking to ensure that you understand your accounting system, rate structure, labor distribution, allocations, unallowables, etc.  This is a fairly invasive audit and should not be taken lightly.

It is the job of the DCAA to ensure that you have the tools to spend the government’s money wisely, and that your accounting system is functional and can withstand future audits.  Their goal is to make sure the government (and thus the American taxpayer) gets the best value for the money they spend.  The DCAA reports annually to Congress on their audit findings and the efficiency of the agency.  In the past several years, the agency has found enough errors in audit to return to the government (the taxpayer), 5 to 7 times the budget of the DCAA.  For this reason alone, they will continue to exist for the foreseeable future.  If you have additional questions concerning the DCAA and/or your firm’s compliance, please contact the experts at ReliAscent.

 - Brian Ormsby, ReliAscent

Topics: DCAA compliance, DCAA