A key aspect of government contracting is making sure your business processes and systems are DCAA compliant. Here we address ten frequently asked questions about DCAA compliance and provide resources to help you understand the process and better prepare for audits.
1. Who is the DCAA?
DCAA stands for “Defense Contract Audit Agency”, which is the government agency responsible for auditing Department of Defense (DoD) contracts. DCAA can also be brought in by other government agencies to provide accounting and financial advisory services and to assist with their audits. Every year the DCAA audits DoD contracts of all sizes – up to billions of dollars – to make sure the military and taxpayers get what they are paying for. This motivation is described in their mission statement: “Supporting the Warfighter and Protecting the Taxpayer”. For more information about DCAA visit their website at http://www.dcaa.mil/.
Understanding DCAA Compliance
2. What is DCAA Compliance?
The phrase “DCAA Compliance” is used widely in the government contracting industry, but DCAA does not actually “certify” contractors as compliant. Being DCAA compliant means following DCAA’s recommendations and guidance so that you remain compliant with federal law and are prepared for audits. DCAA audits are driven by the rules outlined in FAR, CAS and GAGAS (see question 7).
Being DCAA Compliant means your company has in place documented policies and procedures that are strictly followed and meet DCAA’s requirements. 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. For more information on DCAA Compliance, download the Deltek whitepaper “Understanding DCAA Compliance”.
3. What is a DCAA Audit and what are they looking for?
In government contracting, the primary accounting concern is cost. There’s a big difference between accounting conducted by a commercial firm and a government contractor in terms of how costs are classified, segregated, allocated and reported. Some of the common items being scrutinized during an audit are: Allowable costs, unallowable costs, direct costs, indirect costs, cost pools and pooling of indirect costs. All of this and everything else being scrutinized during an audit is spelled out in FAR.
4. What are the various types of DCAA Audits?
The DCAA performs various types of audits including: forward pricing, pre-award, incurred cost, compensation and benefits, contractor purchase systems review (CPSR), labor charging/floor checks, special and other audits. Contracting officers may also request an independent financial opinion on specific elements of a contract. The DCAA typically categorizes these types of requests as “special” or “other” audits. For more information on DCAA audit types, download the Deltek whitepaper “Understanding DCAA Compliance”.
5. What is a Pre-Award Survey?
When you are in the running to win a government contract the DCAA will perform a pre-award survey of your business to ensure you can perform all the duties the contract specifies. Although the pre-award survey is not as in depth as an actual audit, it is a milestone for winning the contract and carries a “pass/no pass” status.
The pre-award survey focuses on two aspects of your business:
- First DCAA will want to ensure that your company has the financial means to complete the tasks required. They will want to look at specific financial documents like cash flow forecasts, bank documents, SEC filings, loan agreements, payroll tax returns and more.
- Second, the DCAA will want to check that your accounting system is acceptable and can keep track of costs properly. Ideally you’ll want to use a system already recognized and trusted by federal agencies and auditors.
6. Where can I get an overview of the DCAA audit process and a general understanding of the submissions I will need to prepare?
DCAA provides an overview of the Audit Process in the DCAA Contractor’s Audit Manual. This manual provides an introduction to DCAA, describes the attributes of an adequate labor and accounting system, price proposals, Cost Accounting Standards, contract financing and interim and final vouchers, and incurred cost proposals.
DCAA also makes available the checklists that DCAA auditors will use for assessment, as well as the DCAA ICE model and EZ Quant applications – all on their website here.
7. What are FAR and CAS?
FAR and CAS are two sets of rules that apply specifically to government contractors that do work for the federal government. DCAA and federal government auditors use FAR and CAS as their rulebooks. FAR is short for Federal Acquisition Regulation, which is essentially the bible of government procurement. It’s the primary set of rules agencies use when purchasing goods and services. The FAR guide can be downloaded from the .gov website here.
CAS stands for Cost Accounting Standards. Established in 1968, CAS was created to drive consistency within and between contractors’ cost accounting practices. CAS tells you how you can charge to contracts, what gets charged to which contracts, dictates how to maintain your accounting systems and tells you how the costs have to flow from incursion to the final costs. It also instructs contractors on how to account for certain types of costs.
For more detailed information on FAR and CAS download the Deltek whitepaper “Understanding the Basics of FAR and CAS”.
8. I am a small government contractor, what resources are available to help prepare me for an audit?
The DCAA Information for Contractors guide provides an overview of DCAA audit processes and the types of audits DCAA conducts, links to checklists, and what you can expect in a DCAA audit. In addition to this guide, DCAA offers targeted information to assist with audit issues that relate to small businesses. Access DCAA presentations below for help on specific topics important for smaller contractors. For additional questions contact the DCAA Small Business Focal Point (571) 448-2008.
- Accounting System Requirements
- Contract Briefs
- Incurred Cost Submissions
- Monitoring Subcontracts
- Proposal Adequacy
- Provisional Billing Rates
- Public Vouchers
- Real-time Labor Evaluations
9. What should I look for in a DCAA compliant accounting system?
It’s a best practice to use an accounting system that will keep you compliant by providing you with accurate data, process flows and reports that will help you respond to audits quickly and effectively. Only a solution designed from the ground up for government contracting businesses can fully and adeptly do this and help you keep up with the industry’s distinctive requirements, without extensive customization.
For more detailed information on what to look for in a system that will keep you DCAA compliant download the Deltek whitepaper “Meeting the Specialized ERP Needs of Government Contractors”.
10. What trends is the GovCon industry experiencing in terms of financial compliance audits?
The Deltek Clarity Annual GovCon Industry survey tracks trends across the industry in a number of areas, including financial compliance. In general what we are hearing is:
- The top three types of audits companies went through this past year were Internal Controls, ICS and Defense Contract Management (DCMA) audits.
- Companies are spending a lot of time preparing for audits and report their top audit challenges to be: Indirect Rates, Labor & Timekeeping and Unallowable Costs.
- To address these challenges they are: re-engineering business processes, investing in automation, and conducting their own internal audits.
For a detailed look at this year’s result, download the full Deltek Clarity report.
With nearly 30 years of experience in government contracting, Deltek provides a breadth of experience unmatched by any other software vendor. Deltek Costpoint was built specifically for government contractors and has earned the trust of federal agencies and their auditors.
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