In government contracting, few things are as nerve-wracking as a Defense Contract Audit Agency (DCAA) audit. However, this analysis is a key factor in the procurement process for government contracts.
The continuity of a contractor’s relationship with the federal government is also contingent on successfully passing DCAA audits. Business and accounting practices, as well as the frameworks the DCAA uses, audit standards, and enforcement policies, are always changing.
This article provides proven strategies to help compliance officers and business executives meet DCAA requirements and excel in DCAA audits.
DCAA Audit Requirements
The Defense Contract Audit Manual (CAM) provides guidance on how DCAA auditors assess compliance with federal regulations, including the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).
The rules are meant to promote fair and reasonable pricing while preventing fraud, waste, and abuse of public funds.
Federal Acquisition Regulation (FAR)
The DCAA uses the FAR as a benchmark to assess contractor compliance. Below are key FAR clauses that intersect with DCAA mandates:
- FAR 31.2 – Contracts with Commercial Organization: Outlines cost principles such as the standards for determining the allowability of costs, identification/segregation of direct and indirect costs, and requirements for recordkeeping.
- FAR 16 – Types of Contracts: Explains the different types of contracts used for federal procurement and their requirements.
- FAR 30 – Cost Accounting Standards Administration: Provides guidance on applying CAS to government contracts and outlines the requirements for disclosing cost accounting practices to the government.
- FAR 42.7 – Indirect Cost Rates: Stipulates requirements for the determination and negotiation of indirect cost rates used to allocate indirect costs to government contracts as well as the submission of incurred cost proposals.
Cost Accounting Standards (CAS)
CAS ensures consistency and transparency in cost accounting practices across government contracts. It is applicable to all negotiated federal contracts valued above $2 million with some exceptions, such as contracts awarded to small businesses and those falling below $7.5 million in value.
Some key CAS principles that companies must comply with include:
Segregation of costs- Treatment of direct and indirect costs
- Consistency in cost estimation, accumulation, allocation, and reporting
- Disclosure of cost accounting practices
Strategic Preparation for a DCAA Audit
Government contractors must have good financial and accounting systems and practices to pass DCAA audits. This involves:
Establishing and Maintaining a DCAA-Compliant Accounting System
Government contractors must ensure that their accounting systems are adequate and compliant with DCAA standards. Some key elements of a DCAA-compliant accounting system include:
- General ledger: Must be accurate, complete, and maintained on an accrual basis.
- Chart of accounts: Must be well-defined and consistent across all contracts.
- Timekeeping system: Should accurately capture time by employee, job title, and contract.
- Job cost ledger: Must accurately track direct and indirect costs by contract.
- Indirect rate structure: Must be based on actual indirect expenses incurred during the fiscal year and applied consistently across contracts.
- Cost allocation methods: Must comply with CAS and FAR and be consistent across all contracts.
- Billing system: Must tie back to the general and job cost ledgers and accurately bill costs to appropriate contracts.
Adequate Recordkeeping
Cost allowability and allocation, job costing, and timekeeping must be backed by adequate records for verification and DCAA compliance.
These records must be accurate and traceable to source documents such as invoices, payroll records, etc. They must also be retained for at least three years after contract completion.
Internal Controls
As mentioned, the DCAA is tasked with ensuring that taxpayers’ money is spent responsibly. As such, the agency is always on the lookout for fraud, waste, and abuse in government contracts.
Internal controls such as segregation of duties, checks and balances, proper authorization, and verification of transactions are integral in identifying or preventing fraudulent activities.
Regular Internal Audits
DCAA compliance is often so gray that even with the best accounting systems and practices, contractors may still miss the mark. Periodic internal audits are necessary for the timely identification and alleviation of deficiencies.
Streamlining the Audit Processes
When DCAA auditors arrive, they will request financial records, require explanations, and perform tests. Contractors must provide easy access to all systems and documentation as well as adequate and timely responses.
Designating a few people as points of contact can help streamline the audit process as they can quickly round up requested information.
Establishing a DCAA Audit Response Plan
After completing an audit, the DCAA will issue a report detailing the findings and recommendations. These should form a basis for a corrective action plan prior to the next audit.
Outsourcing accounting to a CPA firm specializing in government contract accounting can be done in preparation for or in response to a DCAA audit, or both as part of a robust and ongoing strategy.
Achieve and Surpass DCAA Compliance With Diener & Associates
Diener & Associates’ seasoned government accounting experts are current with DCAA requirements, FAR provisions, and CAS principles.
We help government contractors prepare and navigate DCAA audits by providing them with compliant systems and streamlining their accounting practices.
Contact Diener & Associates today for expert assistance in achieving and maintaining DCAA compliance for your government contract.