Government contractors face the challenge of scaling their operations and achieving cost objectives, all while ensuring strict adherence to the Defense Contract Audit Agency (DCAA) compliance standards.
The DCAA evaluates government contractors, focusing on their ability to maintain accurate and reliable recordkeeping and timekeeping practices that meet the stringent requirements set by the government.
This compliance is essential for contractors to avoid penalties, secure contracts, and maintain their reputations within the highly regulated government contracting sector. Unfortunately, to achieve and maintain DCAA compliance, many contractors overwhelm their leaders with new and often competing workflows.
In this guide, we review more effective ways to increase compliance without causing managerial burnout for their valuable business leaders.
What is the Purpose of a DCAA Audit?
DCAA audits compare a contractor’s labor and timekeeping records with stated cost objectives to make sure the project is documented properly.
The standards used by the DCAA to determine compliance are established by the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).
The goal of these audits is to make sure that government funds are used responsibly and transparently. Preparation for DCAA audits involves reviewing all applicable regulations and communicating compliance solutions to a management team.
What Does the DCAA Inspect?
A DCAA inspection assesses a contractor’s records to identify gaps or inconsistencies in the ledgers or faults in their compliance standards. Common factors examined by the auditors include:
- Allowable vs unallowable costs: Auditors compare the costs permitted by the contract with those that are not permitted, such as personal costs, to make sure they remain separate on the contractor’s cost objectives and labor reports.
- Direct costs vs indirect costs: Costs that directly contribute to the contract’s performance (e.g., labor and materials) must be separated on the contractor’s ledger from indirect costs (e.g., utilities, rent, and property insurance).
Commercial businesses often combine them, so contractors need to communicate the distinction to their managers before they sign off on cost reports.
The content of the audit can differ by industry, changes in regulations, or the auditor’s initial impression. However, regardless of the auditor’s focus, contractors can prepare their managers for the task by following this brief guide.
How to Prepare for a DCAA Audit
To prepare business leaders for the audit while communicating long-term standards of DCAA compliance, contractors need to prepare their documents, establish internal controls, and train their staff.
Prepare Documents
DCAA auditors need to follow a transparent document trail to assess a contractor’s timekeeping and recordkeeping processes. New contractors should refer to the DCAA’s Pre-Award Accounting System Adequacy Checklist to learn which documents they need to assemble before their audit.
Each contractor’s document checklist will depend on its contract size, industry, and the auditor’s objective. For example, while large contractors are often audited on their forward pricing rates, small contractors may not need this documentation.
An experienced CPA can help managers assemble the right documentation, make sure the labor hours are approved correctly, and educate teams on the latest compliance practices.
Establish Internal Controls
Contractors must establish internal control procedures to organize their timekeeping processes and properly document labor hours and expenditures within the relevant guidelines. Misallocating or mischarging resources can result in non-compliance.
Team leaders need to have clear guidelines on how to keep accurate and complete transactional data that includes prices, purchase dates, order files, and vendor histories. Hours need to be approved by at least two managers and direct and indirect labor needs to be separated on the ledgers.
Since the purpose of a DCAA audit is to review timekeeping and recordkeeping practices and compare them to regulatory standards, managers need to be trained and informed about the latest rules and regulations to prepare the records for the auditor’s review.
Train Employees
Multi-system compliance requires business leaders who are trained in the requisite standards and methods for maintaining DCAA compliance. Most critical documents needed to pass a DCAA audit are not filled out by accounting staff. Work hours are logged and approved by other personnel.
Business leaders need to know when to sign off on hours, how to check for overtime and time off approvals, how to sort labor hours between projects, and how to communicate DCAA-compliant labor tracking processes to team members.
How Diener & Associates Can Help
New and experienced contractors can become overwhelmed with current and changing DCAA regulations. Team leaders need to focus on maintaining compliant timekeeping and recordkeeping practices to make sure that the auditors have a clear document trail to follow when they assess a contractor’s systems against the relevant financial regulations.
Diener & Associates is a team of experienced CPAs focused on helping government contractors overcome common challenges with federal compliance. Our team of CPAs reviews contractors’ accounting, timekeeping, and legal processes, conducting mock internal audits to detect compliance gaps, and assisting supervisors in their understanding of relevant federal standards, such as the GAAP.
Schedule a consultation today to learn how the expert CPAs at Diener & Associates can help overcome common compliance challenges, even in the business’s first government audit.