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How Can A Small Business Ensure DCAA Compliance?

Written by Hobie Frady on October 8, 2020

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How confident do you feel about passing a DCAA audit?

The main objective of a DCAA audit is to protect taxpayer money by preventing fraudulent billing and securing contracts that deliver more value per dollar. It follows your accounting system and practices are central to achieving compliance.

There are significant consequences for non-compliance. Your business can suffer from loss of future income, cash flow problems as a result of delayed payment, fines and, in serious cases, even criminal charges.

Needless to say, DCAA compliance and passing a DCAA audit should be a priority for small businesses. So, how should a small government contracting businesses go about preparing for DCAA audits and pursuing compliance? Where should you even begin?

DCAA compliance small business presentations

The DCAA website is a great starting point for figuring out what an audit involves. It has a treasure trove of useful resources, and amongst them are presentations targeting small contractors.

For example, the Accounting Systems Requirements presentation outlines conditions for acceptable systems in accounting, labor and timekeeping. It also describes what total contract costs are, the need to segregate direct and indirect costs, how you’d measure indirect costs and what costs are allowable/unallowable.

Additionally, you can familiarize yourself with the audit process. If you would like specific information about the type of audit relevant to your small business, the online Contract Audit Manual and checklists should help too.

Once you have an understanding of what the audit involves, it’s a good idea to gauge the level of compliance of your current processes.

Evaluating your accounting system for DCAA compliance

One of the most important DCAA compliance indicators is an accounting system that follows Generally Accepted Accounting Principles, or GAAP, which specify how financial transactions should be accounted for, measured and recorded.

For example, GAAP requires revenues or costs to be accounted for on an accrual basis. So, if your chart of accounts isn’t set up with receivable/payable accounts or unearned revenue/prepayment accounts, then you could be accounting for costs on a cash basis and, therefore, not DCAA compliant.

Your system and procedures also need to be in accordance with the Federal Acquisitions Regulations (FAR) 31 — Contract Cost Principles and Procedures. Some broad compliance indicators include:

  • Costs are tracked as either direct, indirect or unallowable expenses;
  • Direct costs are Identified and tracked by contract;
  • Cost pools for indirect costs are maintained, with expenditure assigned to them in a logical and consistent manner;
  • Indirect costs are allocated reasonably based on benefits accrued to the contract;
  • Actual indirect cost rates are calculated and monitored monthly;
  • Job cost reports can be reconciled to the general ledger and the billing system; and
  • Unallowable costs are not billed. Unallowable costs are those specifically excluded (like unapproved overtime premiums) or are unreasonable or not allocable.

Configuring QuickBooks for DCAA audit success

Many small government contractors use QuickBooks for their accounting needs, and if you’re one of them, a proactive step you can take is to configure QuickBooks to match DCAA requirements.

For example, if you select “account number” when setting up accounting preferences in QuickBooks, your accounts will be identified by their account number instead of just the description you use. Together with a chart of accounts that’s set up to distinguish cost pools and direct, indirect and unallowable costs, you can demonstrate proper segregation through account sequencing.

Although QuickBooks is not designed to meet FAR and DCAA requirements on its own, there are add-on components and ways to set up for employees, timesheets, payrolls, contracts and funding that makes compliance easier and provides complete reporting.

Evaluating your labor system for DCAA compliance

Of course, an accounting system can only provide accurate costs if the underlying labor information is correct. Consequently, a strong labor system is also essential in passing a DCAA audit.

There are extensive FAR rules that govern labor and timekeeping systems, so while the following points are indicative of basic compliance, it’s important you understand these rules in greater detail when preparing for DCAA audit.

In terms of timekeeping, employee hours should be documented on paper or electronically. Timesheets should be completed daily by employees themselves and approved by supervisors. Your timekeeping system should be capable of identifying employee labor by contract.

A labor distribution system in line with DCAA requirements charges direct and indirect labor to appropriate contracts.

Additionally, information on systems that are operating accurately and effectively reconcile with one another. Therefore, labor cost records should reconcile to payroll records, and your labor distribution records should reconcile to general ledger accounts as well as job cost reports.  Evaluating your billing system for DCAA compliance

Apart from being able to reconcile billed costs to cost accounts, a DCAA compliant billing system also has written policies setting out procedures for identifying unallowable costs and excluding them from billing.

Evaluating your monitoring and review practices for DCAA compliance

Finally, an important sign of DCAA compliance that’s sometimes overlooked relates to monitoring. Established policies, procedures and practices must be backed up by regular management reviews to ensure they’re adhered to. Accumulated expenditure should also be monitored habitually against contract costs or price.

Common compliance challenges for small businesses

Even with the wealth of information available, such as the DCAA compliance small business presentations and checklists, it’s clear that passing an audit requires the ability to understand and put together a lot of technical information.

Without a technical expert or the resources to train up internal staff, it’s difficult to be sure that everything is being done according to regulations.

Although there are accounting software packages designed to meet DCAA requirements, these are not only unaffordable for small businesses, they’re also impractical without appropriately skilled staff to operate them.

For advice on how to structure your chart of accounts and configure QuickBooks for DCAA audit success, talk to one of our GovCon experts at Warren Averett. With our knowledge and experience in the GovCon industry, we can provide valuable suggestions to help you establish DCAA compliant business systems.

Remember, while setting up your systems for DCAA compliance requires an investment of time and effort, having sound practices ultimately increases the competitiveness of your company, and therefore your bottom-line, in the long run.

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