New contractors must contend with numerous federal regulations to achieve and maintain DCAA compliant accounting processes. The DCAA, or Defense Contract Audit Agency, audits the accounting systems of contractors to confirm the government’s money is being used responsibly. The criteria for compliance include updated system architecture, security, and timekeeping processes.
Complying with DCAA accounting principles is necessary for establishing long-term compliance and avoiding financial and legal penalties, up to and including contract termination. Continue reading to learn how new contractors can develop long-term DCAA compliance by overcoming common compliance challenges.
New and established contractors alike can benefit from hiring an experienced CPA to review their accounting processes and better prepare for DCAA audits.
What is DCAA Compliance?
When companies become federal contractors, DCAA guidelines govern the federal oversight of their accounting processes. By developing and maintaining long-term DCAA compliant accounting, new contractors can avoid the consequences of non-compliance, which include:
- Fines
- Civil liabilities
- Contract termination
- Debarment from future contracts
- Legal action
To maintain accounting processes that meet compliance standards, contractors must review key areas, including financial records, and assess them based on the DCAA’s regulations. Those most likely to be assessed include:
- Allowability of costs/activities
- Direct vs indirect cost rates
- Timekeeping records
- Labor tracking
- Contract pricing
- Materials management
Steps To Developing Long-Term Compliance
New contractors need to develop an internal plan to establish compliance, educate employees on federal regulations, and identify compliance gaps before the DCAA’s audit. Follow this checklist to review your systems prior to your audit:
1. Review Job Cost Accounting
DCAA compliant accounting regulations make it necessary to check the contractor’s job cost accounting systems. This includes identifying costs, attributing them to projects or tasks, and tracking them between projects.
Job cost accounting includes cost accumulation, which should be accounted for in the general ledger. Many businesses turn to accounting software solutions to manage job cost accounting.
An experienced CPA can determine the viability of these programs in your current workflow. Keeping these financial records clear and traceable helps contractors establish a long-term compliance strategy.
2. Practice Proper Cost Segregation
Contractors must separate direct and indirect costs, also known as multi-project costs, to maintain transparency in cost reporting. A proper chart of accounts separates costs into cost pools, including direct expenses, fringe benefits, general administrative costs, overhead, and more.
Consumer businesses can aggregate direct and indirect costs on their ledgers, but government contractors must keep them separate. Direct costs, such as manufacturing supplies, should be itemized per contract so the auditors can compare them to the cost estimate.
Indirect costs, incurred by general operations such as employee insurance and property rent, must be organized separately using a chart of accounts. The indirect costs will eventually be grouped to create the contractor’s final cost objective for their contract.
This not only allows contractors to define their final cost objective but also helps the DCAA categorize their expenses at every step of the audit.
3. Research The Relevant Standards
Many contractors lack sufficient knowledge of the standards that the DCAA uses to assess their accounting practices. The relevant regulations are enforced by the DCAA but not supplied by them. Instead, they follow other federal regulations, including:
- Cost Accounting Standards (CAS)
- Federal Acquisition Regulation (FAR)
- Defense Federal Acquisition Regulation Supplement (DFARS)
Unfortunately, these regulations are lengthy and complex. For more information on how auditors use these standards, consult the Defense Contract Audit Manual (DCAM).
Your team leaders should be familiar with how the standards are applied to your business to prepare for the audit. Partnering with a consultant experienced with the expectations of government contracting can ensure all knowledge gaps are covered.
4. Refine Internal Controls
Internal controls are a necessity for DCAA compliant accounting systems. This includes maintaining transparent transaction documentation, identifying compliance risks, detecting risk mitigation opportunities, documenting employee roles, and developing custom training practices to help employees remain compliant.
One of the primary roles of an expert CPA is to identify design gaps in a business’s internal controls to help contractors develop improved controls that meet the expectations of the auditors.
5. Improve Documentation Processes
Record-keeping deficiencies are often revealed during a DCAA audit. Contractors must file expenses, reports, and receipts using organized filing systems. When the DCAA auditor tracks a specific expense, they should be able to follow it through your expense reports, complete with the proof of payment.
Transparency is key when assembling documents for the auditor. Employees should be trained in how to keep compliant records based on DCAA standards and your industry’s guidelines.
Partner With Diener & Associates for Long-Term DCAA Compliance
At Diener & Associates, our CPAs are experienced in DCAA compliant accounting practices. We have been helping contractors adhere to regulations with updated internal controls, mock audits, and revised documentation processes to create a long-term plan for maintaining compliance since 1989.
Whether your business is new to government contracting or an established contractor, let the experienced team at Diener & Associates ensure your compliance. Contact Diener & Associates today for expert guidance in DCAA guidelines and compliant accounting practices.