Businesses that accept government contracts also accept the responsibility to comply with the regulations of the Defense Contract Audit Agency (DCAA). Maintaining DCAA compliance is a meticulous process that involves identifying the agency’s areas of scrutiny and adopting internal policies to meet its requirements.
To help businesses prepare for and pass DCAA audits to retain their contracts and remain compliant, we compiled this brief guide to DCAA policies and procedures that all businesses should know.
What is a DCAA Audit?
DCAA audits are designed to ensure that taxpayer money is being used responsibly by companies with government contracts. The DCAA does not choose contractors, but it makes persuasive recommendations when contracts are negotiated.
The four most common DCAA audits include:
- Forward pricing audit – Examines the cost estimate that the contractor has given prior to the start of its contract
- Incurred cost audit – Analyzes the accuracy of the allowable cost calculations that the contractor presented after the contract was awarded
- Special audit – Focuses on the contractor’s financial records using an independent financial contractor
- Pre-award survey – Examines the effectiveness of the contractor’s accounting and timekeeping systems, typically in the case of small businesses
How Can Contractors Prepare for a DCAA Audit?
To achieve and maintain DCAA compliance, contractors should focus on forming an internal audit team to review audit requirements and conduct test audits, as well as foster a culture of compliance. This includes appointing a compliance officer to help team leaders develop compliant practices and follow DCAA recommendations.
Here are six steps to help businesses get started preparing for DCAA audits:
1. Update Timesheets
Accessible and updated timekeeping records are essential to maintaining DCAA compliance. The DCAA will check for these factors first:
- Accurate direct and indirect work hours
- Employee hour records for each project
- Time allocation that matches the recorded cost objectives
- Accurate charge codes
Businesses still using manual timekeeping methods risk non-compliance and potential criminal charges by leaving their records vulnerable to human error. Timekeeping software and advanced compliance guidance from qualified CPAs can ensure that each employee and supervisor keeps accurate per-project records.
When the DCAA checks the contractor’s labor cost distribution records, they will reconcile them with the payroll records. If they cannot trace each cost to and from the job cost and general ledger accounts, they will re-evaluate the business’s compliance status.
2. Streamline Time Approval
In addition to accurate timekeeping, work records for each project must be approved according to the DCAA’s regulations. Their policies state that daily timesheets must be completed by employees, not supervisors. Each timesheet must also include the supervisor’s approval in the form of their signature.
Each project must be kept separate to provide the DCAA with transparent records of who submitted work time, whose time was approved, and which project they worked on. Making these records available to both supervisors and employees will help your team spot discrepancies before the auditors do.
3. Account for Overtime
When employees record their timesheets, which they should be doing daily, they must include all hours worked. These include uncompensated overtime.
In addition to reconciling the per-project approval hours, the DCAA will compare the labor cost estimates with the actual work hours (or total time accounting).
This means that contractors must require their employees to include overtime on their timesheets. Otherwise, employees could end up overpaid or underpaid, a discrepancy the DCAA will notice when comparing the cost estimate to the timesheets.
4. Record Unallowable Costs
The Federal Acquisition Regulation (FAR) determines certain costs that are unallowable, or not included in government grants and compensation. Contractors must identify and exclude these costs in writing to reconcile any spending records that might otherwise include them, including billings and claims.
Examples of unallowable costs included corporate advertising, guest speakers, and alcoholic beverages, though the specific criteria are defined by FAR in Accounting System Administration.
5. Combine Timekeeping and Accounting
An integrated timekeeping and accounting process helps contractors maintain DCAA compliance by identifying direct costs, per-contract costs, and indirect costs from the same system that records employee work hours.
The Generally Accepted Accounting Principles (GAAP) details how contractors should organize their accounting systems. Examples of procedures for maintaining GAAP compliance include recording transactions on an accrual basis, maintaining accurate revenue recognition for deliverables, and grouping indirect costs by categories (administration, overhead, general, etc.).
6. Leave an Audit Trail
The DCAA will look for any changes made to timesheets and accounting records. Compliant contractors make the trail easy to follow, showing how the information was recorded and changed.
To avoid fines and labor-related charges, businesses should appoint a compliance leader in their management team to help employees understand compliance and prepare the business’s records for the audit.
Select someone who works directly with employees and is capable of creating accurate timesheets with clear reports of any after-record changes.
Audit Preparation With Diener & Associates
At Diener & Associates, our experienced CPAs are trained to assist government contractors in achieving and maintaining DCAA compliance. Our team designs and implements accounting systems, timekeeping systems, and mock internal audits to help contractors understand the DCAA’s procedures and establish a compliance culture in their own business.
Contact Diener & Associates today for expert help in audit readiness.