Your success depends on meeting DCAA (Defense Contract Audit Agency) compliance regulations when working with the government.
Government contracting can be a challenge; when you’ve cleared one hurdle, another one awaits, like finding a government-approved accounting system.
If you want to win defense contracts, you’ll need a DCAA-compliant financial system. Moreover, you’ll learn that responding to proposals without a DCAA compliant accounting system is impossible in some cases.
At Team 80, we ensure small business owners entering the SBIR/STTR program have an accounting system compliant with Federal Acquisition Regulation (FAR) and Defense Contract Auditing Agency (DCAA). If you’re one of those small business owners, this blog is for you.
“Accounting is hard enough without the government as your “partner.” That’s why government contractors should look for an accounting system that already strikes the right balance between ease of use and powerful capabilities.” – Sarah Sinicki, Director of Business Development, Team 80
When creating and pitching a dynamic SBIR proposal, it’s easy to overlook crucial details, like proving you can accurately (and quickly) show how you used their funds. The federal agency you’re working with needs to understand you have an approved system in place before they give you an award. They also want to feel confident you won’t misuse taxpayer dollars or engage in billing fraud (inadvertently or by design).
So, here’s what you’ll need to do: find a DCAA-compliant accounting system.
The government wants you to have an approved accounting system before giving you an SBIR or STTR contract. You also must comply with Federal Acquisition Regulations (FAR). You should familiarize yourself with FAR’s guidebook to learn more about what you can do to ensure everything runs smoothly before the DCAA shows up.
What is the DCAA?
The Defense Contract Audit Agency is a federal agency under the Department of Defense (DoD); they’re “stewards of taxpayer dollars.” The DCAA delivers high-quality contract audits and services to ensure taxpayers and the military get what they pay for at a reasonable price. Their mission has remained the same since 1965.
In 2019, the DCAA examined nearly $365 billion in DoD contractor costs. Their audits saved taxpayers roughly $3.7 billion. The savings go back into the DoD’s pockets for essential military operations, or the government returns the excess cash to the Treasury.
The DCAA is primarily responsible for DoD contracts. However, they’re also often brought in by other federal agencies (like Nasa and the Department of Energy) for contract audits and financial services.
You’ll have the DCAA knocking on your door if a government agency, the Defense Contract Management Agency (DCMA), for example, requests the DCAAs help with an audit.
If you’re not DCAA-compliant, you’ll be answering their call. And that’s not something you want.
What is DCAA compliance?
When you’re DCAA compliant, you’re following their rules, recommendations, and best practices. If that sounds simple, it’s because it is! So stay on top of your record keeping, and use DCAA compliant accounting systems that’ll pass their audits, and you’re off to the races.
Here are some tips to help you stay DCAA compliant:
- Establish and document your policies
- Use a DCAA compliant system capable of tracking multiple cost categories separately
- Make sure your timekeeping records and cost-accounting are fully integrated
- Keep detailed records, and make sure your documents are easily accessible for the eventual audit
*You should note that the DCAA won’t give you a certificate of compliance.
What is the DCAA Pre-Award Survey?
The DCAA conducts pre-award surveys when they’re about to award your small business with a government contract. You shouldn’t confuse the survey with an audit. The survey is simple; it’s an evaluation of your accounting system, and it validates your ability to carry out the government contract tasks.
If you meet the DCAA’s accounting system requirements, and you’re ready to see the contract through financially, you’ll pass. In order to give yourself the best chance of securing a contract, we suggest that you use the pre-award accounting system adequacy checklist. It’ll help you stay compliant and ready for a DCAA audit.
What happens during a DCAA audit?
You shouldn’t fear a DCAA audit, though you should prepare yourself for that eventuality. During an audit, the DCAA will determine if your accounting system adheres to Generally Accepted Accounting Principles (GAAP). They’ll check to ensure you’re recording expenses when you provide a service. Small businesses usually have to overhaul their accounting and record-keeping procedures to comply with GAAP. (If we’ve already sold you on avoiding that headache, let’s talk about how we can help.)
According to the DCAA’s Form 1408 checklist, your accounting system must:
- Properly segregate direct costs from indirect costs.
- Correctly identify and accumulate direct costs by contract.
- Have a logical and consistent method for allocating indirect costs to immediate and final objectives (a contract is considered a final cost objective).
- Be able to accumulate the costs under a general ledger.
- Have a timekeeping system that identifies employee’s labor by intermediate or final cost objectives.
- Have a labor distribution system that charges direct and indirect labor to the appropriate cost objectives.
- Determine costs charged to a contract through regular posting of books of account at least monthly.
- Correctly identify, exclude, track allowable costs based on FAR 31 unallowable expenses.
- Identify costs by contract line item (CLIN).
- Segregate preproduction costs from production costs.
You’ll probably make it through an audit if your accounting system checks every box on this list. And if you’re feeling uneasy, it’s okay; the DCAA wants you to succeed, so they provide audit process overviews and let you see the checklists auditors use for assessments.
What accounting software is DCAA compliant?
Here’s a mind-bending truth. There’s no DCAA approved software, but there is software optimized for DCAA compliance. DCAA compliant software can include any commercial accounting package capable of tracking job costs. For example, Quickbooks provides accurate data, process flows, and reports that you’ll find helpful during an audit.
Still, your comprehensive, government approved accounting system is only one-half of the battle. Your accounting package is only as reliable as your information. In addition, you must establish policies and procedures for routine finance documentation.
And compliance is eternal. Once your software is compliant, it must remain compliant. With the help of a qualified accounting team (like Team 80), you can feel confident that you meet and exceed regulatory requirements.
You should let Team 80 manage your government-approved accounting needs. Here’s why:
You didn’t start your small business to manage tedious accounting tasks. Instead, we want to help you stay focused on researching and developing your SBIR program passion project. That’s why we offer affordable, turn-key accounting services – so you can stay focused on what matters most to your business.
“Federal accounting regulations are complex and ever-changing, both in their wording and how government auditors choose to interpret and enforce them. Team 80 can help you prosper in this challenging environment. When you’re serious about doing business with the federal government, you need an equally serious accounting partner.” – Sarah Sinicki, Director of Business Development, Team 80
We’ve been doing this for more than 20 years. We’ll ensure your system is DCAA compliant – today and into the future. Get in touch today!