To maintain their relationship with federal agencies, new contractors must maintain financial transparency and regulatory compliance. They must be able to demonstrate this in the DCAA audit, with key checkpoints including financial system requirements, timekeeping regulation, labor cost allocation, and billing compliance.
Before conducting an audit, the DCAA informs contractors about the intended area of focus. Having the contractor’s staff prepare the essential documents and process lists in advance of the audit is mutually beneficial for both sides and will expedite the process.
As a result, new contractors never have to go into an audit unaware of the procedures, though the key checkpoints for every federal regulatory compliance standard may vary.
This guide to the key DCAA compliance checkpoints is designed to help new contractors pass their first audit and retain their contracts without risking suspension.
Understanding DCAA Compliance
The purpose of a Defense Contract Audit Agency (DCAA) audit is to verify that government contractors remain financially efficient and procedurally compliant. This includes assessing whether contractor cost representations are accurate, labor is allocated responsibly, and financial security systems are maintained to regulatory standards.
The key regulatory standards come from three primary sources:
- Federal Acquisitions Regulations (FAR)
- Cost Accounting Standards (CAS)
- Truth in Negotiations Act (TINA)
Contractors benefit from maintaining compliance by earning the trust of the agency, establishing a good reputation, and avoiding potential misconduct allegations. Noncompliance can result in contractors being suspended or debarred, followed by contract termination.
In serious cases, they may be registered in the Excluded Parties List System (EPLS), losing their right to future government contracts.
Further audits, agency investigations, whistleblower reports, and Freedom of Information Act (FOIA) requests can be avoided by maintaining compliance as outlined by the DCAA.
Initial Setup and Planning
To pass the DCAA audit, new contractors must establish a compliance plan. This includes identifying compliance roles with relevant stakeholders and departments and setting up internal controls for financial regulation, labor cost allocation, and internal reviews.
For first-time contractors, achieving DCAA compliance can be difficult without the help of experienced CPAs. Continue reading to learn how to establish a baseline for regulatory compliance in your internal systems.
Financial System Requirements
The accounting system requirements constitute the most significant aspect of DCAA audits for new contractors. The main features of a DCAA-compliant financial system include:
- Proper cost segregation
- Job cost accounting
- Accurate timekeeping
- Allowable and unallowable cost tracking
- FAR and CAS compliance
Common pitfalls facing new contractors include a lack of understanding of government requirements, non-compliant timekeeping, a lack of internal controls, and insufficient documentation.
An experienced CPA firm can offer consulting and advisory services to help new contractors better understand and comply with ambiguous government requirements.
Assembling proper documentation and establishing proper internal controls within the business are necessary to ensure that all other processes are accurate.
Timekeeping Practices
A new contractor’s accuracy and compliance in its timekeeping practices will be examined based on several factors, including:
- Accurate Total Time Accounting (TTA)
- Accurate allocation
- Timely spreadsheet submission
- Accurate electronic records
- Labor law compliance
- Employee DCAA training
- Record retention
- Supervisor timesheet approval
- Internal controls against fraud and inaccuracy
- Expert consultation
Regular internal audits and reviews can ensure that these factors match DCAA standards before the review.
Labor Cost Allocation
Contractors must use consistent cost principles to differentiate direct and indirect labor costs. Direct labor hours apply to individual government contracts while indirect labor hours apply to overall contract performance.
Timekeeping records and documents must be organized and easily accessible for the DCAA auditors. Every work record must include basic employee data, including:
- Employee names
- Work dates
- Hours worked
- Work description
Billing and Invoicing Procedures
New contractors must maintain compliant billing practices, including preparing accurate invoices, addressing disputes, and making any necessary adjustments. As a contractor, excessive or incorrect billing could be classified as fraudulent and cause you to lose your contract.
One common pitfall in DCAA-compliant contractor billing is to capture costs per customer rather than per contract. DCAA audits require per-contract billing, invoicing, and revenue records.
Internal Audits and Reviews
Regular internal audits allow contractors to prepare for DCAA auditors by reviewing key processes including billing, financial security, labor allocation, and more. Conducting efficient internal audits can improve compliance, though they are best performed by a third-party CPA experienced in your industry.
Training and Continuous Education
Ongoing employee training in DCAA compliance standards helps new contractors maintain a culture of compliance past their initial DCAA audit. A training program helps contractors keep their systems updated with new regulatory changes while proactively addressing any system lapses.
Experienced CPAs can expedite this process for first-time government contractors to help them pass their DCAA compliance checkpoints during their first audit.
While it can be difficult to find a CPA with the right experience, doing so improves a contractor’s chances of retaining their contract by meeting regulatory guidelines for their first and all subsequent audits.
How Diener & Associates Can Help With DCAA Compliance
The CPAs with Diener & Associates leverage their training and expertise to help government contractors achieve DCAA compliance. Our DCAA-compliant business systems, mock internal audits, and employee compliance training can be customized for the needs of your workflow.
Contact Diener & Associates today to schedule a consultation and learn how our CPAs can help you pass each DCAA compliance checkpoint, even in your first audit.