WHAT IS DCAA COMPLIANCE?
“DCAA Compliance” is really just a simple way of saying that a company’s accounting, financial, and timekeeping systems (the “business systems”) are in compliance with the government’s Job Cost Accounting regulations found in the FAR, and (they also) follow the DCAA’s guidance and recommendations. It is important to note that there is no such thing as a DCAA Approved Accounting System. The DCAA does not officially approve any accounting systems—it merely audits a company’s financial systems to determine if they are compliant.
What is the DCAA?
Before going further, it is helpful to better understand what the DCAA is, and why they matter. First, DCAA is an acronym for the Defense Contract Audit Agency. DCAA exists to provide audits & advisory services to the Department of Defense and other federal agencies that are responsible for acquisition and contract administration. Their primary guide in these audits is the FAR and the DCAA Contract Audit Manual (DCAM).
How does it relate to you and I, as tax payers? Simply put, the DCAA’s charge is to save us money (or at least make sure that the money that is allocated to be spent on contracts in the DoD is spent correctly). When it comes to contractors however, their purpose is to ensure that government contractors are managing their contracts 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.
Before the DCAA was created in 1965, each branch of the US Military conducted their own contract audits. However, this led to disjointed and inconsistent approaches to the process. Everything changed when the DCAA was created. One of the most important early tasks of the DCAA was to create the Defense Contract Audit Manual (DCAM). The DCAM’s purpose was to dictate the specific auditing policies and procedures for auditors, and provide guidance in auditing techniques for DCAA personnel (and it also helps contractors understand what the government is expecting of them as it pertains to government contract accounting compliance, and what to expect in different DCAA audits.
DCAA Compliance and Cost Accounting Compliance
It is important to note not all government contractors and contracts are subject to the DCAA, and the majority of the contracts awarded by the US Federal Government do not require a DCAA compliant accounting system. But, because the DCAA handles the most government contract audits, “DCAA compliance” is often synonymous or confused with government “contract cost accounting compliance,” which is a little different (but part of DCAA compliance). Contract Cost Accounting Compliance is comprised of two sets of standards or rules. These breakdown into Cost Principles & Procedures , and the Cost Accounting Standards (CAS).
Cost Principles & Procedures are found in Part 31 of the FAR. The principles in Part 31 instruct contractors how to properly treat and classify costs ranging from B&P, to direct labor, payroll costs, and many other types. FAR Part 31 also lays out extensive rules about what allowable vs unallowable costs, and what costs the contractor can recover from the Federal Government via their indirect rates.
The Cost Accounting Standards, found in Far Part 30, on the other hand, deal almost exclusively with “allocability;” that is to say how costs must be measured and allocated in your accounting system.
These two standards are important to the DCAA, as their findings will cover the allowability of costs and the allocability of costs, as well as the “reasonableness” of costs. Thus, FAR parts 30 and 31 provide an important basis for DCAA compliance.
What Types of Contracts Does DCAA Audit?
Many start-up government contractors first come to ReliAscent thinking that the DCAA will surely audit them, and they need to get compliant as soon as possible (especially if their award is from the DoD, or the initial RFP or award documentation asks if the “contractor’s system has ever been audited by the DCAA,” which often sets contractors into panic mode but is typically just boiler plate language that is trying to establish if you already have a compliant system).
The good news is that the DCAA is primarily focused on Cost Type contracts. This is due to the fact that under Cost Type contracts, contractors bill for their direct costs as well as an agreed upon rate for their indirect costs (G&A, overhead, Fringe, etc.). Because Cost Type contracts pose the most risk to the government, and because the government is agreeing to pay its “fair share” of your indirect costs, they have to be assured that you are properly calculating your indirect rates, therefore, they need to be insured your have a properly functioning and maintained DCAA compliant job cost accounting system.
Most contracts, however, are Firm Fixed Price, or Time and Material contracts, and these do not require a DCAA compliant accounting system (there are some exceptions, for instance, there can be FFP contracts with Cost Reimbursable CLIN’s, or hybrid-type T&M contracts where the G&A is applied to materials and other direct costs (ODC’s), but we won’t get into that here).
Further, DCAA primarily audits DoD contracts and contractors, but it can also perform audits of for other agencies such as the Department of Energy (DoE), NASA, VA, and DHS (most of the other agencies will contract with third party CPA firms to perform other types of audits—for example, NSF CAP Reviews or Single Audits, also known as OMB A133 or Yellow Book Audits).
One very helpful aspect of the DCAA Audits is that each audit type is clearly laid out for contractors in their written audit programs. These audit programs discuss the purpose and scope of an audit, which sections of the FAR and DCAM are referenced in the audit, the steps taken by the auditor, findings, and concluding steps. This is extremely valuable information for contractors, and we always recommend contractors read up on the various audit types from this directory, so they have a better sense of what to expect (though our accounting teams at ReliAscent handle the audit process for you, and represent the client when working with the DCAA during an audit). However, even if you do not have a DCAA compliance consultant working with you, knowing ahead of time what the DCAA will be asking for in any audit can put you ahead of the game and positioned for a higher chance of success.
Most Common DCAA Audits
The government is more likely to have the DCAA audit a contractor when they perceive the risk to be high enough to warrant their time. Some of the most common DCAA audit types include:
DCAA Pre-Award Audits
The DCAA's SF1408 Pre-award Audit is perhaps the most common or familiar audit to government contractors. These audits are not as detailed as other DCAA audits, and they focus on reviewing your accounting system to verify it is setup to meet all of the FAR and DFARS requirements for an "Acceptable Accounting System." In the Pre-Award Audit, the DCAA requires a contractor to complete SF1408 as a starting point. DCAA then reviews the accounting system to ensure it has all of the features attested to on the SF1408. Pre-Award audits do not audit specific records. Instead, DCAA reports their findings to the Contracting Officer (CO), and if the contractor passes, the CO releases the contract. This is a very common audit for Phase II SBIR/STTR awardees, prior to issuance of the award.
Incurred Cost Audits
Your Incurred Cost Report (also known as the DCAA ICE Submission), is the financial representation of both your direct and indirect costs of work that was performed during your FY. The ICE is used to ensure that your claimed actual costs and billed costs reconcile (simply put: make sure you did not overbill the government, and if so, how much you will need to repay them). The DCAA uses the ICE to ensure that contractors are following the requirements set forth in the FAR, and that their accounting system is GAAP compliant.
Incurred Cost Reports are required to be submitted to the government 6 months after the end of the contractor's fiscal year for cost reimbursable type contracts. The DCAA will audit the incurred cost reports, and given the complexity and importance of your incurred cost reports, these can be extremely stressful and difficult for contractors. Again, here, as with other DCAA audit types, having well written policies and procedures for your job cost accounting and timekeeping systems, and then maintaining DCAA compliance throughout the entire year is critical to ensure your organization can pass an ICE audit. ReliAscent® can not only help you prepare your Incurred Cost Report, but our experts can guide you throughout the audit process and help to ensure it is as smooth and painless as possible.
Pricing Proposal Audits
The CO is responsible for assuring the government and taxpayers that the pricing on your proposed contract is fair and reasonable—which may cause them request an audit of your pricing. If the contract exceeds the $2 Million threshold set for in the Truth In Negotiations Act (TINA), contractors are required to submit pricing information along with their proposals. However, the CO may instead request this information via a DCAA audit. DCAA may also request other information supporting a contractor’s proposal pricing (referred to as Basis of Estimate, or BOE).
On rare occasions, the CO can even request that a DCAA auditor review an SBIR proposal to verify that proposed costs are reasonable and allocable. This review, or audit, is often conducted as an on-site visit by a DCAA auditor. The auditor will ask for specific information t0 help justify your costs, such as your indirect rates and other financial records.
Accounting System Audits
Accounting System Audits are a highly detailed audit of a contractor's accounting system. Accounting System Audits are designed to verify the operation of an acceptable accounting system by auditing a sample of records within the system to verify proper operation of the accounting system in compliance with FAR and DCAA requirements and guidance. Phase II SBIR awardees will often experience one of these audits during the performance of the award.
How do I Bring My Accounting System into DCAA Compliance?
If your business has just been awarded a Cost Type contract (or Time and Material that is treated as a Cost Type), or, if you are required to have a DCAA compliant accounting system to even submit a proposal (which can be the case with certain government procurement vehicles like the NAVY’s Seaport-e), you will need to ensure that your accounting and related business systems and processes (including policies & procedures, accounting manual, and other tools) are compliant.
This is an important concept for new government contractors to understand; you can’t simply purchase “DCAA compliant software,” like a general ledger system or timekeeping system, and now achieve compliance. Further, the DCAA does not only audit your software. Rather, each aspect of the system and your polices and manual procedures must be setup properly and maintained in compliance indefinitely.
ReliAscent specializes in setting up and maintaining DCAA compliant QuickBooks accounting systems, and can handle this complicated task for you. To learn more about our DCAA compliant job cost accounting systems and how QuickBooks can be made DCAA compliant, visit our DCAA Compliant Accounting Systems page, or read our blog, “How to Make QuickBooks DCAA Compliant.”