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How To Prepare For A DCAA Audit

April 25, 2022, by Michael Diener

man during office auditThe DCAA uses a standard process to conduct contract audits which include a review of financial and transactional information and a floor check, in which they may question employees at the worksite about timekeeping practices. By understanding what takes place during a DCAA audit, you can properly prepare beforehand to help ensure the audit process goes smoothly for your contracting business and for the DCAA.

What Is A DCAA Audit?

The Defense Contract Audit Agency (DCAA) performs contract audits for government agencies. A DCAA audit is issued when a contracting agency wants to verify the costs associated with a contract. This specifically applies to cost-reimbursement contracts; fixed-price contracts are not subject to DCAA audits. During an audit, the DCAA reviews the contractor’s compliance with the Federal Acquisition Regulation (FAR) and other regulations.

What Conditions Must I Meet to Remain DCAA Compliant?

It is important to keep in mind that the DCAA does not directly certify government contractors as compliant or noncompliant. Instead, they \ present their audit findings to the government agency and the government contractor. With that said, there are things government contracting businesses can do to help ensure compliance with FAR and other contracting regulations. The following is a closer look at several conditions that should be met during a DCAA audit.

Your Business Must Meet Generally Accepted Accounting Principles (GAAP)

Generally accepted accounting principles, also called GAAP, must be followed at all times, especially as it relates to direct and indirect costs established in the Federal Acquisition Regulation (FAR) part 31.202 and 31.203. GAAP, which includes a set of accounting standards, principles, and procedures, was established by the Financial Accounting Standards Board. It is important for contractors to review and fully understand GAAP compliance and/or hire a CPA firm that understands the relevant standards and procedures that must be followed.

You Must Segregate Your Direct And Indirect Costs

cost audit conceptYour organization should pool your costs into separate pools, one for direct costs and another for indirect costs. To do so, your organization should have a clear policy as to what is considered a direct cost and what is indirect. It should also be recorded within your accounting software in a manner that is clear and easy for the DCAA auditor to understand and approve.

The Contractor Must Provide Their Direct Costs By Cost Element Or Project

Additionally, your costs must be assigned to a cost element (i.e. labor, travel, odc, etc.) or project, rather than grouping all of your costs into a single account regardless of the project. This is made much easier by simply choosing a reliable accounting software system. Many contractors use Quickbooks to simplify this process and make it easy.

You Must Meet All DCAA Requirements For Employee Timekeeping

One of the primary reasons for a failed DCAA audit is that employees did not know how to properly record their time or they fail to record their time in a manner that can be approved and verified by the DCAA. To avoid this concern, it is important to educate your employees on how to properly record their time while they are performing their work each day. A supervisor is not permitted to record time on behalf of employees; every employee must do it on their own.

How Can I Setup My Accounting System for DCAA Compliance?

The best way to prepare for a potential (or imminent) DCAA audit is to ensure your accounting system is DCAA compliant. This can be done in several steps. However, for most contractors, the steps can become rather complex, and it may be best to hire a CPA professional to assist you. While every case is unique, the steps that are usually involved with setting up an accounting system for DCAA compliance include the following:

  1. Install or update a general ledger program
  2. Establish timekeeping practices that are DCAA compliant
  3. Properly train employees on timekeeping practicesEstablish payroll practices that are government compliant
  4. Establish a system to perform indirect rate calculations
  5. Establish your organization’s DCAA compliant policies and procedures

As every case is unique, many contractors benefit from discussing the specifics of each step with a CPA professional. However, for all government contractors, it is best to use a reliable accounting software system (e.g. Quickbooks) and remain consistent when recording costs and time. Also, it is imperative to ensure all of your employees record their time properly and understand precisely how to do so the proper way.

The best way to ensure compliance is to perform internal audits similar to those performed by the DCAA, including floor checks and interviews with your employees to verify they understand their role in remaining DCAA compliant (specifically as it relates to timekeeping).

If your government contracting business is in need of support in preparing for a DCAA audit, it is best to reach out to a certified public accountant. A knowledgeable team of CPAs remain up-to-date on all DCAA audit requirements and can ensure your business is in compliance and prepared for an audit at any time.

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