DCAA compliance is a requirement for government contractors, ensuring adherence to the accounting standards set forth by the Defense Contract Audit Agency (DCAA). Choosing the right accounting software for DCAA compliance is essential for maintaining accurate records, facilitating audits, and preventing costly penalties.
Although the DCAA does not endorse any accounting software program, there are DCAA specific accounting requirements that contractors must meet through methods, procedures, and controls, part of which may be accomplished with a software program.
The following will detail some features to look for in accounting software as part of your total DCAA compliance protocol.
Understanding DCAA Compliance
As a business owner, understanding DCAA compliance for government contractors makes it possible to successfully navigate the complex world of government contracts. The DCAA audits these contracts and ensures that they are executed per regulations and accounting standards.
DCAA compliant accounting requires strict adherence to specific accounting principles and practices. Among these, accurate cost tracking is a fundamental requirement. Contractors must be able to track costs associated with their projects and contracts, ensuring that expenses are properly allocated and categorized.
This includes distinguishing between direct costs (those directly attributable to a specific contract) and indirect costs (those incurred for multiple contracts or general business operations). Accurately tracking costs enables contractors to provide transparent financial information and facilitate proper cost allocation during audits.
Maintaining an auditable trail is another required aspect of DCAA compliance. Contractors must be able to provide a clear and traceable record of all financial transactions, including invoices, receipts, and supporting documentation. This audit trail allows the DCAA to verify the accuracy and integrity of the contractor’s financial data and ensures transparency and accountability.
Preparing comprehensive incurred cost submissions is also fundamental in achieving DCAA compliance. Government contractors must submit these reports annually, providing detailed information on their incurred costs for a specific contract.
Submissions must include indirect cost rate calculations, segmenting costs by category, and supporting documentation for each cost element. Accurate and timely submission of these reports is essential for maintaining compliance and facilitating the audit process.
During audits, contractors must be able to support their financial records and transactions through documentation for costs, labor hours, and other financial activities. Contractors must be able to generate reports and compile necessary documents promptly, simplifying the audit process and reducing potential issues.
1. Data Reliability and Accuracy
According to the DCAA’s SF 1408 checklist, one of the key aspects of compliance in an acceptable accounting system is ensuring that the accounting system and related cost data are both accurate and reliable.
This is in accordance with the criteria outlined in the Defense Federal Acquisition Regulation Supplement, or DFAS, section 252.242-7006(a)(1), which emphasizes the importance of a system that provides accurate and timely financial data that’s in line with all required regulations.
Furthermore, your accounting software should have mechanisms in place for reconciling subsidiary cost ledgers along with cost objectives tied to the general ledger. Having these mechanisms in place can further help you maintain consistent, accurate records.
2. Cost Segregation and Allocation
As outlined in DFARS 252.242-7006(c)(2) and (c)(3), DCAA compliant accounting software should support segregating both direct and indirect costs. This means that the system should be able to distinguish costs that are directly associated with a contract, such as labor and materials, from costs that could be spread among multiple contracts of objectives, such as administrative overhead.
Furthermore, your chosen software should also allow you to identify and accumulate direct costs by contact, which ensures that there are no overlaps or misallocations in your accounting.
3. Comprehensive Timekeeping and Labor Tracking
Under sections 252.242-7006(c)(9) and (c)(10) in the DFARS, your DCAA compliant accounting software must have an integrated timekeeping system that accurately tracks the labor of your employees and contractors by intermediate or final cost objectives.
Your system should be detailed enough to allow you to distinguish different tasks or projects that are worked on, ensuring an accurate distribution of labor.
4. Identifying and Excluding Unallowable Costs
Your DCAA compliant accounting software should have features that enable easy identification and exclusion of unallowable costs, as outlined in DFARS 252.242-7006(c)(12). Doing so ensures that these costs aren’t included with any billings or claims that are associated with a government contract.
Having proper mechanisms in place to ensure compliance with Federal Acquisition Regulations (FAR) guidelines, especially regarding cost allowability, is essential.
5. Flexible and Transparent Billing
In line with DFARS 252.242-7006(c)(16), an essential feature in DCAA compliant accounting systems is the ability to generate billings that actively align with the contract’s terms and can be reconciled to the cost accounts for current and cumulative amounts claimed.
This includes adhering to any restrictions related to billing frequency, withholding provision, and any other stipulations the contract may have. Furthermore, your accounting software should support collecting any cost account information that may be required by contract clauses, ensuring that any interim rates and the contract’s total expenditure are monitored routinely.
Maintain DCAA Compliance with Diener & Associates
Achieving DCAA compliance is paramount for government contractors to maintain financial integrity and successfully navigate audits. When evaluating your accounting software’s compliance with DCAA requirements, consider robust time and expense tracking capabilities, proper cost segregation and allocation features, an audit trail and documentation functionalities, and support for incurred cost submission preparation.
Ensuring that your DCAA compliant accounting software includes these key features can greatly enhance your contract management processes, help you avoid penalties, and establish a solid foundation for financial accountability.
Even with the best accounting software, an overall accounting system may not be DCAA compliant without the right methods, procedures, and controls in place. For expert guidance and assistance with government contract accounting compliance, contact the experienced CPAs at Diener & Associates to learn more about our accounting services.