The successful onboarding and management of government contracts hinges on compliance with regulations set forth by the Defense Contract Audit Agency (DCAA). However, with the high level of complexity and strict requirements, this often proves to be challenging, especially for small to medium-sized businesses obligated to execute complex government contracts.
Partnering with an experienced DCAA accountant can make a significant difference. It is within their expertise to decode the intricate DCAA regulations and provide practical guidance and solutions to ensure compliance and maximize profits.
Below is a practical guide to the core DCAA regulations and a breakdown of how a DCAA accountant can help in compliance.
The Defense Contract Audit Agency (DCAA) is the auditing body for Department of Defense (DOD) contracts. In a bid to ensure that taxpayer dollars are spent responsibly and efficiently, DCAA establishes and enforces various regulations, including:
Cost Accounting Standards (CAS)
Cost Accounting Standards (CAS) are 19 standards and rules promulgated by the U.S. government to determine costs on negotiated procurements. The standards require the estimation, accumulation, and reporting of costs to be accurate and consistent. This ensures that the government only pays for actual expenses incurred and not any additional overhead or profit.
Generally Accepted Accounting Principles (GAAP)
If CAS isn’t applicable, Generally Accepted Accounting Principles (GAAP) are used to govern accounting and reporting standards for government contracts.
This means contractors are prohibited from utilizing cash-based accounting — a method often employed for tax preparation by small businesses not mandated to secure financial statement audits. Instead, contractors must adhere to GAAP-compliant, accrual-based accounting principles when maintaining records for government contracts.
Allowable vs. Unallowable Costs
DCAA also validates contract expenses. For costs to be allowable, they must be reasonable, allocable to the contract, and compliant with CAS. Unallowable costs are not directly related to the contract or do not comply with regulations.
Some expressly unallowable costs include bad debts, contingencies, contributions or donations, and entertainment. Unallowable expenses can also be mutually agreed upon. All unallowable costs must be excluded from billings and proposals to the federal government.
The DCAA also requires that the accounting systems used by government contractors be capable of segregating allowable and unallowable costs. FAR 42.709 allows contracting officers to penalize contractors that bill expressly unallowable costs to the government.
Direct Costs and Indirect Costs
DCAA regulations require that costs be charged as either direct or indirect based on the nature of the expense. Direct costs are those that can be specifically attributed to a particular contract. Typical examples include labor expended in meeting objectives or materials used in executing the contract.
Indirect costs are those that cannot be easily allocated to specific contract objectives or intermediate expenses. These costs are allocated in logical groupings, also known as cost pools or allocation bases, and allocated to final cost objectives based on the benefits the final cost objectives receive from these indirect costs.
Labor Costs and Timekeeping Requirements
One of the central tenets of DCAA compliance is accurate labor costing and timekeeping. These regulations mandate that the cost of labor, which includes the wages and salaries of employees working directly on the contract, be accurately reported and allocated.
Note that labor costs are not supported by external documentation or physical evidence as with other costs. As such, DCAA requires timekeeping records to accurately reflect labor hours incurred in the performance of a contract. These records must be detailed, complete, and supported by payroll documentation.
How a DCAA Accountant Can Help
The above regulations may seem unsurmountable to many government contractors. The competition involved in securing government contracts is also fierce, meaning margins for error are razor-thin. But all of this becomes manageable when a DCAA accountant is involved. Some of the ways a DCAA accountant can help include:
- Developing and implementing policies and procedures to ensure compliance
- Preparing cost proposals in accordance with CAS and FAR requirements
- Setting up an appropriate accounting system that meets government requirements
- Developing cost pools and allocation bases to allocate indirect costs accurately
- Providing guidance on allowable vs. unallowable costs
- Implementing efficient timekeeping systems
- Conducting DCAA mock audits to prepare for official audits
- Providing training and education on DCAA regulations.
Contact Experienced DCAA Accountants
Winning a government contract and the success of its management largely depend on the level of expertise of the contractor’s accounting team. Diener & Associates brings over 30 years of experience in government contract accounting and compliance.
Our DCAA accountants provide the professional efficiency and technical expertise needed to navigate the complex regulatory landscape of government contracts and run a profitable business. Contact Diener & Associates today and let us help you achieve sustainable success in government contracting.