Bringing an accounting system into alignment with Defense Contract Audit Agency (DCAA) requirements requires far more than basic bookkeeping; it calls for specialized controls and compliance-focused processes.
An accounting system must demonstrate its ability to separate costs, produce accurate billings, and comply with federal cost principles to be accepted for use under certain contracts.
Organizations preparing for this transition often encounter a mix of technical standards and audit-driven procedures. Developing policies, configuring systems to align with regulations, and documenting compliance in a manner that satisfies auditors are all part of the process.
When managed effectively, the transformation reduces risk, prevents costly contract withholds, and positions a business for long-term success in the federal marketplace.
What DCAA Compliance Means
Defense Contract Audit Agency compliance is rooted in regulations defining an acceptable accounting system for Department of Defense contracts. The standard appears in DFARS 252.242-7006, which outlines eighteen distinct criteria that must be satisfied for a system to be judged adequate.
The DCAA does not officially approve or certify accounting systems when asked; instead, it audits them if a federal agency requests it, and the contracting officer decides if the system is acceptable.
Before an award, agencies frequently use Standard Form 1408 to verify whether an accounting setup can handle cost-reimbursement or progress-payment requirements. The DCAA provides a checklist and a master audit program that auditors follow when conducting these pre-award surveys.
A strong grasp of these requirements helps organizations position themselves effectively before entering into contracts that fall under the business-systems clause framework.
Establishing a Baseline and Gap Assessment
The first step toward a successful transformation is developing a thorough knowledge of the organization’s existing accounting environment. Mapping existing systems to the criteria in SF 1408 and the DFARS standard is an essential first step.
Each criterion should be documented, with evidence demonstrating how the accounting design addresses the expectations. Maintaining a complete packet of this information is valuable when the pre-award survey occurs.
Contract types and their associated clauses must also be considered. Cost-type contracts, for example, include FAR 52.216-7, which establishes the indirect-rate lifecycle, billing rate rules, and incurred cost submissions. Other provisions, such as FAR Subpart 42.7 and FAR 42.704, govern how provisional and final indirect rates are determined.
Recordkeeping requirements add another layer, with FAR Subpart 4.7 and FAR 4.703 specifying retention periods and the treatment of imaged records. Adjustments to document controls may be necessary to remain aligned with these expectations.
Designing Systems to Meet DFARS Criteria
Once gaps are identified, the next stage involves configuring systems to meet DFARS 252.242-7006 requirements.
Clear segregation of direct and indirect costs and ledgers that reconcile to the general ledger is important. Indirect cost pools and allocation methods must be logical, consistent, and able to calculate rates directly from accounting records in accordance with FAR Part 31.
Timekeeping represents one of the most heavily scrutinized areas. Employees must enter time daily, supervisors must approve entries, and labor distributions must clearly connect to cost objectives.
Organizations should anticipate unannounced floor checks, which are designed to verify whether timekeeping practices match documented policies. Invoices must reconcile cumulative and current amounts, and unallowable costs must be excluded through careful account coding and month-end reviews.
When contracts demand it, tracking at the contract line item number or unit level is necessary. Management reviews or internal audits should be scheduled to test policy compliance and demonstrate active oversight.
Building Policies, Procedures, and Training
Written policies and procedures give structure to accounting practices, but they must accurately reflect the system’s capabilities.
A timekeeping policy, for example, should describe daily entry rules, approval processes, correction protocols, and procedures for telework situations. Employees and supervisors need training to apply these practices and consistently prepare for floor checks.
Controls for unallowable costs should describe how common expenses under FAR Part 31 are mapped, how monthly scrubs are performed, and how removed charges are documented. Indirect-rate methodologies must clearly define cost pools and bases, describe the causal-beneficial logic behind allocations, and explain how rates are calculated.
Billing procedures should demonstrate how cumulative amounts tie back to the job-cost subledger and the general ledger. Where contract line item tracking is required, a dedicated procedure should document the method used to capture and reconcile those details.
Managing the Rate Lifecycle and Billings
Another important stage in the transformation process involves establishing and managing indirect rates and billing practices.
Provisional billing rates must be agreed upon with the contracting officer or cognizant auditor under FAR 42.704. Rates should be set close to anticipated final amounts and adjusted when necessary to prevent significant year-end adjustments.
When preparing incurred cost submissions, contractors must comply with FAR 52.216-7(d)(2). Adequate proposals must be submitted within six months after the fiscal year end, using the ICE model and ICE manual developed by the DCAA. The submission requires detailed schedules that are reconciled with the accounting records.
Once final rates are settled, a completion voucher must be submitted within 120 days, consistent with FAR 52.216-7(d)(5). Attention to these deadlines helps avoid disputes or delays in payment.
Preparing for Pre-Award and Monitoring Post-Award
Before an award, contractors must be able to provide evidence that their accounting systems are sufficient and compliant.
A complete survey packet should include the SF 1408, the DCAA checklist, written policies, screenshots of system configurations, example timesheets, labor distribution reports, indirect rate calculations, and invoices that show current and cumulative billings. The DCAA’s audit program 17740 provides guidance on what auditors examine during the survey, making it a valuable resource for preparation.
After the award, monitoring continues. Auditors may conduct real-time labor checks or review employee time entries on short notice. Maintaining current procedures, training records, and point-of-contact information demonstrates ongoing compliance with relevant regulations.
Should deficiencies arise, contracting officers have the authority under DFARS 252.242-7005 and PGI 242.70 to impose payment withholds until weaknesses are addressed.
Maintaining DCAA-Compliant Accounting
Transforming an accounting system to meet DCAA requirements is a demanding process, but it also creates a stronger financial foundation that supports growth in federal contracting.
At Diener & Associates, our team combines decades of government contracting experience with the responsiveness and personal attention typically found in a small firm. Acting as trusted advisors, we help businesses design compliant systems, strengthen internal practices, and prepare for the demands of pre-award and post-award audits.
For organizations ready to advance their capabilities, schedule a consultation online or call 1-(703)-386-7864 to speak with our professional CPAs about how we can provide the expertise and partnership needed for lasting success.