To maintain successful government contracts, new contractors must educate their leaders and team members on the specific requirements of Defense Contract Audit Agency (DCAA) accounting. The DCAA checks financial, labor, and accounting systems against approved regulations and standards. The auditors’ goal is to make sure that the government’s money is being used responsibly in compliance with relevant federal, state, and industry statutes.
Contractors who plan on renewing their contracts, scaling their operations, and maintaining a productive relationship with DCAA auditors, must gain a nuanced understanding of DCAA requirements and apply them throughout their organization. This compliance roadmap can help new and established contractors navigate the DCAA audit process and successfully renew their contracts.
1. Understand the Purpose of DCAA Audits
The purpose of DCAA audits are to ensure that government contractors are following the Federal Acquisition Regulation (FAR). This status is a significant factor in determining the likelihood of contract renewal for a business. Failing legal compliance standards can result in negative consequences for the business, including:
- Contract termination
- Debarment
- Financial liabilities
- Legal repercussions
Due to these consequences, contractors should educate their leaders, department heads, and teams on the key documents in DCAA compliance audits, including:
- Pre-Award Accounting System Adequacy Checklist
- Federal Acquisition Regulation (FAR)
- Cost Accounting Standards (CAS)
- Generally Accepting Accounting Principles (GAAP)
These complex documents contain the necessary accounting practices and standards, but they require administrative labor to review. A CPA experienced with government contracts can be an advantage for contractors of any size as they translate federal regulations to their specific workflows.
2. Understand DCAA Cost Segregation Standards
Segregation of costs are defined differently by the DCAA for government contractors. For non-government businesses, direct and indirect costs do not have to be segregated in accounting documents, whereas the DCAA requires this distinction for government contractors.
Direct costs, which are those that directly impact production, and indirect costs, such as utility costs or property rent, must be separated, allowing DCAA auditors to distinguish between the cost objectives and expenditures of different contracts.
Separating the costs specific to certain contracts (direct) and those shared between all contracts (indirect) allows the DCAA to trace the contractor’s cost estimates to each expenditure. Accurate cost segregation leads to an easier audit process as well as a more efficient workflow.
Experienced contractors establish cost groups and distribute resources based on the logical allocation of each project. The DCAA can associate each cost to a project and easily check for compliance.
The more transparent a contractor’s accounting process is, the more likely a DCAA auditor will approve their contract renewal. Even when compliance gaps are detected, accurate cost segregation helps contractors fix the issues quickly and meet DCAA standards.
3. Understand DCAA-Compliant Timekeeping
Labor distribution is a key point of the agency’s compliance audit. This includes accounting for employee hours, confirming labor hours per project with at least two supervisors’ signatures, and accurately charging specific labor to the contracts that account for it in their cost objectives.
Accurate and compliant timekeeping creates a transparent paper trail of timecards, supervisor signatures, and contract labor attribution that can be easily reviewed and verified by the auditors. Conducting similar verification reviews internally, checking on the status of overtime, and confirming time-off approval can help contractors avoid issues during the real audit.
Cost accounting practices can help contractors achieve DCAA-compliant timekeeping by treating individual contracts as separate jobs. This includes keeping labor, expenses, and revenue documentation separate to aid in classifying each cost on a per-contract basis.
4. Understand Unallowable and Allowable Costs
Tracking unallowable and allowable costs separately is another key point of contention in DCAA audits. Since the federal government only reimburses contractors for allowable costs, financial accounting teams must be diligent in their cost records.
Examples of unallowable costs include advertising, penalties, legal fines, and all personal expenses. Allowable costs are those incurred in the direct performance of the contract and allowable indirect costs.
Contractors who know this ahead of time establish separate accounts specifically for unallowable costs to make it clearer, not only for the auditors, but also for their accountants. The FAR goes into more detail about the information on cost allowability that contractors should know to create a long-term compliance plan.
Deploy a Long-Term Plan for DCAA Compliance with Diener & Associates
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 your business overcome common audit challenges and develop a long-term plan for DCAA compliance.