Government contracting offers the opportunity for a reliable stream of business, long-term projects, and steady revenues. The downside is that it’s also one of the most heavily regulated markets. The strict compliance requirements meant to protect taxpayer dollars can be overwhelming for participating contractors, especially those new to the market.
Below is a comprehensive guide to DCAA regulations, challenges in compliance, and tips for new contractors looking to maintain a good standing with the DCAA.
What Is DCAA Compliance?
DCAA compliance refers to adherence to the regulations, guidance, and recommendations set by the Defense Contract Audit Agency (DCAA). The DCAA is the government agency responsible for auditing and advising recipients of federal funding in return for the delivery of goods or services.
DCAA compliance is assessed by DCAA auditors during an audit, which is usually triggered by the contracting officer. A DCAA audit can also be conducted at the request or established need of federal entities.
The contractor’s systems, processes, contract terms, and financial records are assessed during an audit. These include:
- Timekeeping and labor tracking
- Allowability of costs
- Indirect cost rates
- Contract pricing and billing
- Materials and subcontract management
Compliance Challenges Facing New Contractors
New government contractors often find themselves on the wrong side of DCAA compliance due to:
Procurement/SF-1408 Criteria
Before becoming government contractors, businesses must pass a pre-award survey, also known as the Standard Form 1408 (SF-1408) criteria. The SF-1408 determines if a contractor’s accounting system is capable of meeting contract requirements. Below are the main elements of the SF-1408 criteria:
- Accounting system
- Timekeeping
- Proper segregation of costs
- Exclusion of unallowable costs
- Labor distribution
- Billing system
- Accumulation of costs under general ledger control
Lack of Enough Understating of DCAA Requirements
Despite not having its own regulations, the DCAA enforces multiple regulatory frameworks. These include:
- Federal Acquisition Regulation (FAR)
- Cost Accounting Standards (CAS)
- Defense Federal Acquisition Regulation Supplement (DFARS)
These frameworks are vast, their regulations complex, and not all apply to every contractor. The DCAA expects contractors to have a good grasp of these regulations and always keep up with changes.
There’s also the Defense Contract Audit Manual (DCAM) — an internal guidance document containing guidelines for DCAA auditors, which is also in line with the frameworks mentioned above.
Insufficient Internal Controls
Compliance with the DCAA also requires sufficient internal controls. New contractors may find it challenging to establish proper procedures and processes for timekeeping, labor tracking, cost allowability, and contract management.
Inadequate Documentation
Contractors who may not have optimized their record-keeping processes may find themselves struggling to provide the requisite detailed records and documents. These include policies, procedures, and supporting documentation for all claimed costs, such as invoices, receipts, and subcontract agreements.
Best Practices for Maintaining Compliance With DCAA
To ensure compliance with DCAA regulations, new contractors should consider implementing the following best practices:
Adopt Compliant Accounting Systems
Cost tracking, allocation, and invoicing are the foundation of DCAA compliance. They are also the most frequent areas of citation for non-compliance, especially for indirect costs. As such, contractors should have an accounting system that exhibits the following features:
- Accurately track direct and indirect costs
- Allocate costs to contracts accordingly
- Allow for segregation of allowable and unallowable costs
- Produce accurate and timely billing invoices
- Allow accurate and detailed record-keeping
- Have an audit trail to trace the flow of costs
- Comply with relevant regulations
- Maintain adequate internal controls
Train Employees on Compliance Requirements
All accounting and compliance staff must be well-trained in DCAA compliance and have a good understanding of regulations, expectations during an audit, and procedures for maintaining compliance. Maintain records of all training and retraining conducted to ensure employees are up to date with any changes in regulations.
Keep Up with Changes in Regulations
Changes in any regulatory framework the DCAA enforces can significantly affect compliance requirements. When such changes happen, contractors’ systems and processes will require adjustments.
As such, contractors should be up to date with changes in these regulations. An effective way to do this is through collaboration with compliance experts or staying current with industry publications.
Implement Internal Controls
The DCAA expects government contractors to demonstrate a commitment to detecting and preventing errors, fraudulent activities, and other cases of non-compliance. The agency also expects contractors to manage risks associated with government contracts.
To achieve this, contractors should establish strong internal controls that include:
- Written policies and procedures for compliance
- Regular monitoring and internal audits
- Proper documentation and record-keeping processes
- Segregation of duties and responsibilities
- Training for employees on their roles in maintaining compliance
- Reporting and resolving any instances of non-compliance
Partner With Diener & Associates for Support in DCAA Compliance
The expert CPAs at Diener & Associates stay up to date with changes in DCAA regulations and industry best practices.
We can facilitate business with the procurement and management of government contractors through compliant accounting practices. Contact Diener & Associates today for expert guidance and support for DCAA compliance.