Government contractors are responsible for maintaining regulatory compliance to renew their contracts and avoid legal penalties. They must have in-depth knowledge of the relevant compliance standards, which include regulations of the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS), and Fair Labor Standards Act (FLSA).
Before the Defense Contract Audit Agency (DCAA) conducts an audit, government contractor accounting processes should be examined for bottlenecks, gaps in employee education, and potential liabilities. Challenges in maintaining compliance vary by contracting agency and industry. However, across the board, accounting and timekeeping are common compliance challenges.
The following highlights those issues and solutions to help government contractors prepare their staff for the audit process, and avoid penalties.
Accounting Compliance
Compliant accounting systems can be a challenge for new and old contractors alike. For regulatory compliance, Federal Acquisition Regulations (FAR) and Cost Accounting Standards (CAS) dictate how contractors should maintain their systems to pass DCAA audits.
Combining direct and indirect labor is one common mistake that contractors make in trying to maintain DCAA-compliant accounting practices. While direct and indirect labor can be accounted for together in commercial contracting, they must be separated in the ledgers of government contractors.
This means that administrative tasks, a common example of indirect labor, must be recorded separately from production labor. Labor segregation allows DCAA auditors to compare a contractor’s stated cost objectives with its recorded work hours.
DCAA-compliant accounting also requires labor to be clearly distributed between tasks, projects, and contracts, and tracked via work orders so auditors can match payroll records to individual workers.
They compare this paper trail to the contractor’s labor cost attribution to separate activities from processes, fixed and variable costs, and other aspects of compliance.
For contractors to maximize their contract eligibility, accounting systems must be compliant as well as transparent, with a paper trail that can be easily followed by DCAA auditors and compared to the contract terms, cost objectives, and relevant federal statutes.
Timekeeping Compliance
Effective timekeeping in government contracting means accurately recording employee labor hours and costs with clear identifying information that meets DCAA standards for compliance. This includes identifying labor by the relevant cost objectives.
Timekeeping compliance also involves internal oversight of employee labor-tracking in accordance with FLSA, FAR, and state labor laws. Common timekeeping compliance challenges include:
- Failing to track or assign overtime to the relevant cost objective
- Failing to account for employee breaks
- Failing to adhere to federal or state minimum wage laws
Auditors examine labor distribution and attribution to compare the records to the stated cost objectives and relevant legislation, such as state laws regarding overtime and minimum wage. To overcome these challenges, supervisors should oversee all labor hours recorded per contract, per project, and per employee.
Supervisor authorization of labor hours and employee leave must be recorded accurately so DCAA auditors can follow the trail back to the contractor’s payroll records. Top-performing contractors record any exemptions and intervene in any payment discrepancies before the audit.
An experienced CPA can help contractors attribute employee work hours, find gaps in supervisory authorization, and detect discrepancies such as unauthorized time-off requests, unpaid overtime, or minimum wage violations.
How to Maintain DCAA Compliance
When evaluating their accounting and timekeeping practices, many contractors seek modern methods of maintaining compliance without dramatically increasing their administrative costs. Consider these methods when evaluating your internal systems before the DCAA’s audit.
Learn the Generally Accepted Accounting Principles
GAAP, or Generally Accepted Accounting Principles, is a list of financial compliance standards implemented by the GASB, the Governmental Accounting Standards Board. All companies that receive federal contracts are required to maintain GAAP-compliant accounting processes.
The main principles that contractors must account for include regularity, consistency, sincerity, prudence, continuity, periodicity, and materiality. These words stand for statutes that dictate how the GAAP evaluates a contractor for its financial transparency, record-keeping clarity, and accounting ethics.
Experienced CPAs are familiar with GAAP to guide contractors through the DCAA compliance audit process and help them establish internal controls that will maintain their compliance status in the future.
Diener & Associates Can Help Overcome DCAA Compliance Challenges
Diener & Associates is a team of experienced CPAs focused on helping government contractors overcome common challenges with federal compliance. Our team of CPAs reviews contractors’ accounting, timekeeping, and legal processes, conducting mock internal audits to detect compliance gaps, and assisting supervisors in their understanding of relevant federal standards, such as the GAAP.
Schedule a consultation today to learn how the expert CPAs at Diener & Associates can help you overcome common compliance challenges, even in your first government audit.