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A DCAA Compliance Checklist for Government Contractors

Written on May 12, 2020

Do you know what the government is looking for when it comes to the accounting system of its contractors?

While you can study the SF 1408 Pre-Award Survey to understand their criteria, it can be difficult to figure out what evidence is necessary to demonstrate that your business satisfies DCAA audit requirements. That’s why we have come up with a practical DCAA compliance checklist of the QuickBooks reports you should provide, along with an explanation of what these reports are and why they’re needed. We’ll also touch on common compliance issues relevant to the pre-award audit.

Broadly, DCAA will want to examine three main areas: the way your accounts are set up, the flow of transactions in your accounting system and computations derived from it.

DCAA Compliance Area: The Way Your Accounts are Set Up

Having your accounts correctly set up is the cornerstone to DCAA audit compliance because it allows direct costs, indirect costs and unallowable costs to be distinguished easily.

Checklist item #1: Chart of Accounts

You can provide a copy of the Chart of Accounts in QuickBooks by clicking on “Accounting”, then selecting “Chart of Accounts and Run Report.”

Warren Averett DCAA Compliance Checklist image

The Chart of Accounts is essentially a list of general ledger accounts in which financial transactions are posted.

You’ll need to be deliberate about your account sequencing to separate costs that are direct, indirect and unallowable, and you’ll also have to break down indirect costs further into pools for fringe, overhead and general and administration expenses. Depending on your business, you could use a two-tier or three-tier indirect structure, or single or multiple overhead pools.

DCAA will also examine your Chart of Accounts to make sure you’re following Generally Accepted Accounting Principles (GAAP). Having accounts like Accounts Payable, Accounts Receivable, Prepaid Expenses and Unearned Revenue will show that you’re accounting for cost and revenue on an accrual basis.

DCAA Compliance Area: The Flow of Transaction

From a DCAA point of view, the following reports are useful for tracking how transactions flow through your accounting system to ensure they’re recorded accurately and reconcile with other systems like timekeeping and billing.

Checklist item #2: Trial Balance

The Reports functionality in QuickBooks allows you to print a Summary Trial Balance or a Working Trial Balance. The former summarizes the debits and credit balances on each of your accounts, the latter contains more details like the opening balance, transactions, transfers and closing balance.

Checklist item #3: General Ledger Detail

Similarly, the general ledger detailed report is available from the “Reports” section in QuickBooks and provides beginning balances, transactions and ending balances for each account over a specific period.

DCAA Compliance Area: Computations

In addition, DCAA will check your processes for allocating revenue and costs to projects, as well as the way you calculate your indirect rates.

Checklist item #4: Profit & Loss by Job

A key requirement highlighted in the pre-award survey is the accounting system’s ability to accumulate costs by project. Therefore, a Profit and Loss by Job report that agrees with the standard Profit and Loss (P&L) gives confidence that this can be done accurately.

You can extract this report in QuickBooks by selecting a “Profit & Loss Detailed Report” and customizing it with a job filter.

Checklist item #5: Labor Distribution Report

Labor distribution describes the process of allocating labor costs, including both direct and indirect costs, to the total time recorded on timesheets.

To run labor distribution in QuickBooks, you’ll need to ensure employee details, compensation data and payroll items are set up in the system. There should be a payroll item for every kind of labor you have, including things like paid time off and holiday. You should also double check that account mappings are correct so labor costs are posted to the right general ledger accounts.

It’s a good idea to separate cost categories so that you have direct labor for government contracts, direct labor for commercial contracts, overhead for government contracts and overhead for commercial contracts.

What DCAA wants to see is that labor costs are fairly distributed among customers—both government and commercial—and that no one is favorably treated by receiving a cost subsidy.

Checklist item #6: Contract Backlog Report

A Contract Backlog Report allows you to see the percentage of work completed and the remaining cost to complete for each job in your backlog. It basically tells you how much money is left on a contract, whether there could be a potential contract overrun, and if there are corrective actions required as a result.

Issues relating to revenue recognition or unbilled accounts receivables can sometimes arise. Revenue recognition could differ depending on the type of contract: Time and Materials (T&M), Cost-Plus-Fixed-Fee (CPFF) or Firm-Fixed-Price (FFP). But generally, billed amounts should be based on the accounting principle of matching contract revenue with the cost associated with earning that revenue.

In terms of unbilled receivables, you may have unbilled accounts receivable amounts for numerous reasons, including rate variances where actual indirect rate are greater or less than provisional or target rates.

Checklist item #7: Rate Calculations

QuickBooks cannot perform rate calculations, but you don’t need a system-generated figure to be compliant. You can achieve DCAA audit compliance if you show a template on an external spreadsheet that you have used in the past to correctly calculate your indirect rates.

When it comes to wrap rates, you’ll have to justify the basis of your calculations. FAR requires that you show trends and budgetary data to establish the reasonableness of proposed rates to be evaluated. These can be based on reasonable sales forecasts and costs, but smaller firms with limited budgetary data can use historical data to calculate out-year rates.

Checklist item #8: Monthly/Period Close Checklist

The final item on our DCAA compliance checklist is more about providing the auditor with information about the processes you have in place to check for errors in your books and ensure the true financial position of your business is disclosed each month.

The month-end or period-close process essentially involves recording transactions, verifying and adjusting account balances, performing reconciliations and printing, as well as monitoring, relevant reports. Done effectively, these processes should highlight potential mistakes in your accounting system and other financial or business issues.

Learn More about DCAA Compliance

Achieving DCAA audit compliance takes time, effort and specialist knowledge. Apart from having an understanding of relevant regulations, you’ll also need to structure your Chart of Accounts and configure QuickBooks correctly. If you’re unsure about your company’s accounting system and data, Warren Averett can help. With years of industry experience, our experts are well-positioned to identify and resolve potential DCAA compliance issues before an audit begins.

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