DCAA Compliance Guide

One of the most important aspects of becoming a government contractor is complying with a flurry of federal rules and regulations. This includes including creating business systems that are compliant with the DCAA, which performs contract audits for the Department of Defense (DoD) and many other agencies. This guide addresses some aspects of what’s known as DCAA compliance, and how contractors can reduce risk by avoiding and preparing for audits.

It is in the government’s best interests—on ethical, practical and political levels—to ensure that funds are spent properly. One of the ways it ensures that contractors spend money appropriately is through audits. These audits are meant to determine whether contract costs are allowable, allocable and reasonable.

The Defense Contract Audit Agency (DCAA) performs contract auditing for the DoD and certain other federal agencies. The scope of the DCAA’s influence is significant. That’s because the DCAA provides definitive recommendations to contracting officers that affect negotiations with nearly 7,500 contractors in a typical year. Contracting officers are then better able to negotiate prices and settle contracts for services and supplies using DCAA recommendations.

The DCAA has no direct role in determining which companies are awarded defense contracts; instead, it provides recommendations to the government officials who first select contractors to perform government-funded work and then negotiate prices accordingly for the products and services offered. The DCAA audits only contractors; it has no internal audit responsibilities for the DoD.

The phrase “DCAA compliance” is used widely in the contracting industry, but the agency does not actually certify contractors as “compliant.”

Being DCAA compliant means following the agency’s recommendations and guidance so that you remain compliant with federal law and are prepared for audits.

It also means that your business systems are compliant with DCAA’s requirements. For instance, your accounting system should be able to track costs separately such as direct and indirect costs, accounting costs, billing costs, and labor costs. Ideally it should be fully integrated with your timekeeping system and be able to keep track of all of the reports that DCAA wants to see during an audit.

Your Guide to Understanding DCAA Compliance

Learn what the DCAA does, what types of audits it carries out and how to get and stay compliant.

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The DCAA performs a number of types of audits, including forward pricing, special audits, incurred cost, pre-award and other audits. Contracting officers may also request an independent financial opinion on specific elements of a contract, in addition to an assessment of compliance with specific acquisition regulations or contract terms, a contractor’s business system, and the like. The DCAA typically categorizes these types of requests as “special” or “other” audits.

• Forward pricing: Forward pricing audits are generally completed before contract award. The DCAA evaluates a contractor’s estimate of how much it will cost the contractor to provide goods or services to the government.
• Special audits: Special audits can be conducted before or after contract award. Most of the reports in this category are issued in response to requests from contracting officers. In these instances, the contracting officers need an independent financial opinion on specific elements of a contract or on a contractor’s accounting business system in order for the contract work to proceed—making special audits a high priority.
• Incurred cost: Incurred cost audits determine the accuracy of a contractor’s annual allowable cost representations. When a contract price is not fixed, the DCAA conducts an incurred cost audit after contract award to determine the accuracy of contractor cost representations.
• Pre-award surveys: Many small businesses are affected by DCAA Standard Form (SF) 1408 pre-award surveys. The major objectives of this audit are to gain an understanding of the contractor’s accounting system, complete the SF 1408 form, Pre-Award Survey of Prospective Contractor (Accounting System), and form an opinion as to whether the contractor’s system design is acceptable for the award of a government contract. Contractors that are audited must be able to demonstrate their accounting system to the auditor and implement it before incurring any costs on a contract.
• Other Audits: Other audits primarily consist of audits performed after contract award, and can be requested by a contracting officer or initiated by the DCAA. The DCAA typically initiates this type of audit when there is high risk, such as where the contractor has inadequate business systems.

DCAA audits are driven by the rules outlined in the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS), and system requirements. The primary method of tracking where government money goes is by accounting processes, so it is particularly important that contractors perform scrupulous accounting. Here are the three areas where contractors need to be compliant with DCAA standards:

1. Federal Acquisition Regulation (FAR): The FAR gives federal agencies overarching guidance on audits: a set of consistent, uniform policies and procedures within the federal acquisition process.
2. Cost Accounting Standards (CAS): Many DoD contractors (with a complex set of exceptions) must comply with the CAS, which are meant to create consistency in pricing and accounting practices.
3. Timekeeping & Labor Charging System Requirements: Contractors must also establish timekeeping procedures and use an automated timekeeping system.
   

Learn More About FAR & CAS

Every contractor is responsible for remaining compliant with all the government rules and regulations that apply. Misconduct could be exposed by a whistleblower, audit, investigation, Freedom of Information Act (FOIA) request or other means. The consequences of illegal and unethical conduct or noncompliance can include suspension, debarment, voided or terminated contracts, listing in the Excluded Parties List System (EPLS) and criminal and civil penalties.

Civil and Criminal Penalties

Civil penalties for noncompliance are determined per violation, per invoice. The government can recoup thousands of dollars, and the contractor runs the risk of paying the government up to three times the damage. Criminal penalties are much more serious—up to several years of imprisonment for whoever signed the certificate of cost and pricing data.

Debarment

Debarment is one of the most serious punishments the federal government can impose on a contractor. A contractor can be debarred for committing fraud in obtaining or performing a contract, violating antitrust laws or a number of other offenses. A debarment from one agency has government-wide effects. Solicitation bids and proposals from debarred contractors cannot be considered, unless the agency head determines a compelling reason to do so in writing.

Voided or Terminated Contracts

The FAR gives agencies the ability to void and rescind contracts for which there has been:

• Final conviction for bribery, conflict of interest, disclosure or receipt of contractor bid or proposal information
• Final conviction of source selection information in exchange for either a thing of value or to give anyone competitive advantage

Are you prepared for the accounting, compliance, proposal and contract management demands you’ll be faced with as a contractor? Do you have the systems in place that you’ll need? Start by leveraging Deltek Costpoint, the industry-leading ERP for government contractors, to maximize business performance and realize better project results—all while incurring fewer risks and reducing compliance costs.

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