DCAA and DCMA Audit Obligations for Defense Contractors

This post features high-level compliance themes, such as item unique identification (IUID) and cost accounting standard (CAS) requirements, which every manufacturer operating in the government contracting space needs to understand in order to secure opportunities and continue to operate successfully within the market.

By Peter Collins, Founder and CEO, A2B Tracking

The two previous fiscal years (2018 and 2019) marked the first full financial statement audits of the Department of Defense (DoD). These were massive audits that covered more than $2.7 trillion in United States military assets. The audits were carried out by more than 1,200 auditors, in more than 900 site visits, each year across the entire Department of Defense, with more audits are on the way. If there is one message that is loud and clear following these past two years, it’s that defense audits should be recognized as an annual exercise for the entire defense community, manufacturers included.

Today’s defense contractors need to have business systems in place to help them achieve compliance to Defense Contract Audit Agency (DCAA), for financial accounting, and Defense Contract Management Agency (DCMA), for physical assets, audits.

Financial Improvement and Audit Readiness (FIAR)

The topic of audit readiness begins with the directorate that has been put forth by the Department of Defense Comptroller’s Office – the financial improvement and audit readiness (FIAR) directorate.

The goal of this FIAR plan is to focus on the financial management of the DoD by improving internal controls, resolving material weaknesses and advancing the Department’s fiscal stewardship. This audit readiness focus spans all branches of the DoD and the contractor community that supports them.

Audit readiness includes DoD property, plant equipment, operating material and supplies. It puts the highest priority on the accounting controls and accountability of all mission-critical assets. Which means that there needs to be accountability throughout the asset’s lifecycle, from cradle to grave.

DCAA Audit Obligations

The DCAA provides the Department of Defense with audit and other financial advisory services to support government contract administration. In regards to the FIAR requirement for financial accountability, the DCAA has two main areas of focus:

• Where is the asset specifically located?
• How much did the Government pay for the asset?

Regarding the financial accountability of a government contract, there are reporting standards that have been established known as the cost accounting standards (CAS). There are 19 CAS standards outlined in the cost accounting manual (CAM). The most important of these standards as they pertain to the FIAR obligation are:

• 8-401: Consistency in Estimating, Accumulating and Reporting Costs
• 8-405: Accounting for Unallowable Costs
• 8-406: Cost Accounting Period
• 8-410: Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
• 8-411: Accounting for Acquisition Costs of Material
• 8-418: Allocation of Direct and Indirect Costs.

These standards are critical for a DCAA audit, and organizations need to be able to prove their compliance. Auditors will want to verify the financial costs of any mission-critical assets that are in a contractor’s possession. But, they are also looking to determine that the organization has business systems in place to track and manage this financial responsibility.

Deltek Costpoint is uniquely positioned to support this DCAA audit readiness obligation. Costpoint provides unparalleled visibility and financial control for better management of project costs. Costpoint was built with the purpose of helping organizations maintain compliance to CAS, federal acquisition regulation (FAR), defense federal acquisition regulation supplement (DFARS), Sarbanes-Oxley Act (SOX) and other accounting obligations in order to pass DCAA audits. Virtually every transaction is recorded to an element of a contract or a project work breakdown structure. This means that financial traceability to the final cost objective is assured.

DCMA Audit Obligations

To compliment the financial accountability obligations, there are also property and asset management-specific obligations that flow from this FIAR directorate. These physical asset management audit obligations typically fall under the domain of the DCMA.

The Pentagon has provided guidance on the FIAR obligation to prioritize all mission-critical assets, defined as:

• Military Equipment – ships, aircraft, etc.
• Inventory – rations, supplies
• Operating Materials and Supplies – ammunition, missiles
• General Equipment – material handling, training, testing equipment.

In order to meet the FIAR obligation for any of these mission-critical assets, there are specific data about those assets that need to be reported to the government. In particular, the financial asset management information required includes:

• Item Unique Identifier (IUID)
• Category/Type
• Location
• Status
• Description
• Custody
• Controlling/Financial Reporting Entity.

This all returns to the objective of the FIAR initiative, enabling the DoD with an accountable property system of record. As a government contractor, the obligation is to report that asset data through to these government systems. The goal being to maintain accountability of this mission-critical inventory, verify that the assets actually exist and that the records are complete.

A2B Tracking’s platform, UC! Web, a government property management business system, integrates with Costpoint to provide enhanced asset management functionality to support these DCMA obligations. By taking advantage of automated reporting to government systems (e.g., PIEE, WAWF, IUID Registry, PCARSS, GFP Module), as well as advanced barcode and modern radio-frequency identification (RFID) technology, Costpoint users are able to save time and improve the accuracy of government property and inventory.

An Unbeatable Audit Readiness Solution

Costpoint as a solution provides DCAA compliance readiness to help defense contractors account for their financial responsibilities. UC! Web fulfills compliance for DCMA obligations with enhanced asset visibility and robust audit trails, along with automated data exchange to PIEE, WAWF, GFP Module, IUID Registry and PCARSS to easily report to government systems. The combination of Costpoint and UC! Web is unbeatable for achieving and maintaining compliance to both DCAA and DCMA audits.

Get a more in-depth take on DCAA and DCMA compliance with experts from both Deltek and A2B Tracking during the webinar DCAA and DCMA Audit Readiness available now. Important details on FIAR, CAS, IUID policies and the importance of full contract visibility are reviewed.