The primary goal of a DCAA (Defense Contract Audit Agency is a United States Department of Defense agency that is overseen by the Under Secretary of Defense) audit is to safeguard taxpayer funds by eliminating false billing and maximizing the value of each dollar spent. It subjects government contractors to stringent accounting processes and procedures to ensure that those goals are met.
Small businesses and big-name contractors that aim to win government contracts must ensure DCAA compliance and pass a DCAA audit. This can be particularly important for SMEs (small and medium-sized companies are businesses that employ fewer than a certain number of employees, which is stated as 500 in the US) since they are major economic drivers with unique challenges.
Their survival often depends on securing a contract from a government body, making it imperative to maintain compliance with all of the rules and regulations put forth by the DCAA. For this reason, it is a good idea to opt for Small Business CPA Services. But does the DCAA really audit SMEs, and if yes, what does it entail?
What Can SMEs Expect From DCAA Audits?
Having a small business accounting system that fulfills DCAA standards is critical if you want to submit bids for government contracts.
Here are six DCAA audits you can expect as a small business owner:
This is a relatively common audit. An Acceptable Accounting System is defined under the FAR and DFARS (DFARS 252.242-7006). Typically, the DCAA asks the contractor to complete Standard Form SF1408 as an initial point. The DCAA then assesses the accounting system to ensure it meets FAR and DFARS criteria.
This type of audit doesn’t take long because it doesn’t go into extreme detail. The DCAA informs the Contracting Officer of their findings, and a decent mark allows the CO to award the contract. This is a typical Phase II SBIR/STTR awardee audit.
The Contracting Officer has to ensure that the pricing of a proposed contract is reasonable and fair, and they may seek an audit to confirm just that. If the contract exceeds the TINA (Truth in Negotiations Act is an act that mandates contractors to provide data for certified cost or pricing) level, i.e., $2 million, the contractor must disclose pricing information with the proposal.
Otherwise, the CO (Officers with authority to enter into contracts on behalf of the United States federal government) may request it and audit it. The DCAA can also ask for more information to support the pricing foundation in the proposal. This is called the Basis of Estimate (BOE).
If the contract is cost-based, such as a CPFF or a Fixed Price with Progress Payments, the vouchers are subject to periodic audits. The DCAA checks that the charges are correctly reported and linked to the vouchers. This tests the accounting system’s functionality.
Incurred Cost Proposal Audit
If the contractor is reimbursed for expenditures, they must produce a yearly reconciliation of all costs, including indirect costs. This is due 6 months after the contractor’s fiscal year ends.
If the expenses differ from the previous year’s billings, the government adjusts them to ensure that actual costs are covered instead of predicted prices. Next, they audit all incurred cost submissions. The CO or DCAA may accept the application without audit in some situations. This type of audit is relatively frequent for Phase II SBIR/STTR awardees.
Accounting System Audit
Accounting System Audits examine the contractor’s accounting processes in detail. It is designed to inspect a representative sample of records to ensure that the accounting system functions correctly. One of these audits is customary for a Phase II SBIR/STTR awardee.
The DCAA can visit your business premises unexpectedly. However, they will notify you before undergoing a floor check audit. They randomly stopover at employees’ workstations to ensure correct labor logging and timesheet usage.
Moreover, they take brief interviews of employees to determine whether they are appropriately educated on the company’s time charging policies. Therefore, as the contractor, you must ensure that your labor recording procedures are correct and up-to-date and that all employees are at their workstations during work hours.
How Can a Small Business Meet DCAA Requirements?
Non-compliance can result in serious repercussions such as late payment penalties, fines and even criminal accusations that can harm your firm. So, what steps could a small government contracting company take to prepare for DCAA audits and ensure compliance?
Study DCAA Compliant Small Business Presentations
The DCAA website is an ideal place to learn about audits. It offers several beneficial materials, including presentations aimed at small contractors.
You can also learn about the auditing procedure. The downloadable Contract Audit Manual and criteria should also assist you in understanding the types of audits that apply to your small business.
Undergo A DCAA-Compliant Accounting System Evaluation
Accounting systems that follow GAAP, or Generally Accepted Accounting Principles, are one of the most critical DCAA compliance indicators.
Your system and procedures must also be compliant with FAR 31 — Contract Cost Principles and Procedures.
Audit Your Labor System For DCAA Compliance
Of course, a sound accounting system requires accurate labor data. Thus, a robust labor system is necessary to pass a DCAA audit.
Monitor And Review DCAA Compliance Guidelines
Finally, monitoring is an often-overlooked sign of DCAA compliance. Regular management evaluations of policies, processes and practices are required to ensure compliance. Constantly compare accumulated expenditures to contract costs or prices.
Ready To Overcome Small Business Compliance Issues?
Despite the abundance of information accessible, such as the DCAA compliance small company presentations and checklists, passing an audit clearly demands technical knowledge. Remember that while establishing your DCAA compliance processes takes time and work, good practices eventually boost your company’s competitiveness and, thus, your bottom line.
Reach out to a certified public accountant (CPA) to learn more about obtaining and maintaining federal contracts. Professional CPAs can guide you through each step of the compliance process to ensure your success. They also confirm your contracts are properly documented, regulated and audited by the DCAA.