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Tips for Protecting your Government Contracting Business with QuickBooks DCAA Compliance

Written by Hobie Frady on September 5, 2020

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Is your QuickBooks configured for DCAA audit compliance?

Many small government contractors use QuickBooks as their accounting system, but, while there are ways to set up the software to conform to DCAA rules, it’s not designed to meet DCAA audit requirements straight out of the box.

So, if you’re sending a proposal for a government contract, or have recently submitted one, here are some configuration tips to help.

Understand SF 1408 – Pre-award Accounting System Survey

Achieving DCAA compliance with QuickBooks begins with studying the SF 1408 Pre-award Survey Checklist. This checklist sets out the criteria of what the government is looking for in the accounting systems of its contractors.

The SF 1408 Survey, or Pre-award Audit, tends to be conducted before the award of any cost-reimbursement type of contract, with the purpose of assessing whether your accounting system is robust enough to accumulate costs in accordance with contract terms.

There is a big focus around costs—how they are classified, segregated, allocated, reported and billed—because DCAA’s main objective is to protect taxpayer money through reducing the risk of excessive or incorrect billing.

As a part of fulfilling this objective, DCAA auditors compare your accounting system design and capabilities with the SF 1408 Pre-award Survey criteria. If you cannot demonstrate that your QuickBooks system is adequate, then you will not be awarded the prospective contract.

Ensure Your Chart of Accounts Follows GAAP

Fundamental to a compliant accounting system is a chart of accounts that follows Generally Accepted Accounting Principles (GAAP) and is structured to distinguish cost pools easily.

The chart of accounts is essentially a list of general ledger (GL) accounts where transactions are posted. Some business owners mistakenly believe that getting this right would automatically result in DCAA audit compliance, but the chart of accounts is just the first step.

When configuring your QuickBooks, it’s essential to be deliberate about dividing direct and indirect costs through your chart of accounts sequencing. Indirect cost accounts should be broken down into pools, such as fringe pool, overhead pool, and general and administrative pool, but it can be difficult for a business to decide between a two-tier or three-tier indirect cost pool structure.

Additionally, you’ll need to have a separate sequence of accounts for unallowable expenses.

Your general ledger should include accounts like payables and receivables, as well as prepaid expenses and unearned revenue, to demonstrate your accounting system is on an accruals basis.

Document Your Timekeeping Practices

Another critical component of the Pre-award Survey is timekeeping because labor costs are calculated using timesheets. While not a formal requirement, your timekeeping system is ideally automated and integrated with QuickBooks.

Your timekeeping practices should be documented, including policies around:

  • When time needs to be recorded;
  • How authorizations are set up; and
  • Controls to ensure employees are charging time to the right contracts and labor categories.

In terms of QuickBooks setup, make sure you enable time tracking—for payroll employees in company preferences—so relevant reports are available.

You can select “first day of work week” in Company Settings to coincide with the day when weekly timesheets begin. This enables payroll periods and timesheet periods to be the same, and it simplifies accounting and reporting processes.

A common mistake that government contractors make is netting income and expenses when these should be posted separately. It’s also important to remember that reimbursed expenses should be tracked as income.

Fairly Allocate Labor Distribution

You’ll need to think about labor distribution when configuring QuickBooks for your business as well. Labor distribution refers to the process of allocating labor costs (including both direct and indirect costs) to the total time recorded on timesheets.

From the DCAA auditor’s perspective, what matters is that labor costs are allocated fairly so no customer or contract receives favorable treatment.

To run a labor distribution report, you’ll need to set up QuickBooks correctly with employee details, compensation data and payroll items. You should have a payroll item for every kind of labor you have, including things like paid time off and holidays. These should be mapped correctly so labor costs can be posted to the right general ledger accounts.

It’s important to have separate cost categories—such as direct labor for government site, direct labor for company site, overhead for government sites and overhead for company sites—and map them to the correct GL accounts so that indirect rates are calculated accurately.

Identify Costs by Contract, Not Customer

In line with the rules in Federal Acquisitions Regulations (FAR), the Pre-award Survey checks the ability of your accounting system to identify and accumulate direct costs by contract.

For example, if you have five contracts with one of your customers, and if you’re capturing costs, revenue, and billing information on a customer rather than a contract basis, then you’re not meeting FAR or DCAA audit requirements.

However, you can set up QuickBooks to track customer jobs, tasks and sub-tasks at the level you need. In the Customer Center of QuickBooks, you can have multiple layers of customers and select an appropriate level to track revenues and expenses. You can specify the contract type, such as a time and material contract (T&M), firm-fixed-price contract (FFP) or cost-plus-fixed-fee contract (CPFF), and enter other custom contract information. You can also set up several jobs under one customer.

Set Up a Funding Tracking System

Another area to take into consideration for DCAA QuickBooks compliance is your funding setup.

DCAA audit compliance requires your billing to be based on contract provisions. You have the responsibility to make sure the total amount billed does not exceed any contract or work order funding limitation or any other contract ceiling amount. In practice, this means tracking amounts billed against the contract award as well as having progress reports to compare estimates versus actuals.

This kind of tracking can be done in spreadsheets, but setting up a funding system in QuickBooks would reduce the chance of errors.

QuickBooks DCAA Challenges for Small Businesses

Although there are other accounting software packages designed to meet DCAA audit requirements, these tend to target larger companies with dedicated staff to operate them.

For smaller businesses, QuickBooks remains a practical choice, offering a balance of affordability and flexibility. For tailored advice about QuickBooks DCAA compliance for your business, our experts at Warren Averett can help. We have extensive knowledge and experience in the government contracting industry, and we can support you in setting up an accounting system to achieve your desired results.

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