If you ask me, "DCAA compliance" is just a buzz word. The term is meant to describe the requirement for government contractors to have an accounting system which is compliant with GAAP, the FAR, DFARS (if you are a defense contractor), CAS and other applicable regulations. Compliance is determined following an audit by the DCAA, or the Defense Contract Audit Agency. As a government contractor, you must have an adequate accounting system to be awarded a cost-type contract and should have one for all other contract types. You must be DCAA compliant to be successful as a government contractor.
When a client asks the question, "What is DCAA compliance?" I encourage them to read the DCAA publication Information for Contractors (DCAA Manual No. 7641.90, June 26, 2012). I do this for a couple of reasons. First, it's sort of required reading for government contractors. DCAA auditors will want to know if you have read it. Second, clients quickly realize they will want professional guidance on their journey. Soon though, I'll just refer them to ChatGPT 👍
DCAA stands for Defense Contract Audit Agency, which is a United States government agency responsible for performing contract audits for the Department of Defense and other federal agencies. DCAA compliance refers to the set of rules and regulations that companies doing business with the US government must follow to ensure that their financial and accounting practices are in accordance with the DCAA's requirements.
DCAA compliance involves ensuring that a company's financial and accounting systems are properly designed, documented, and maintained, and that they comply with generally accepted accounting principles (GAAP) and other applicable regulations. This includes ensuring that the company's books and records are accurate and complete, that costs are properly allocated and accounted for, that timekeeping and labor reporting systems are accurate, and that the company's internal controls are sufficient to prevent fraud, waste, and abuse.
Companies that are awarded contracts with the US government are typically subject to audits by the DCAA to ensure that they are in compliance with these requirements. Failure to comply with DCAA regulations can result in penalties, fines, and even loss of government contracts.
As the owner of a small business who is concerned with DCAA compliance, you should answer "yes" to these questions:
- Is my accounting system designed correctly?
- Is my accounting system documented?
- Is my accounting system maintained?
Your accounting system design should be based on the criteria in SF-1408: Financial reporting should be in accordance with GAAP. Direct and indirect costs should be properly accounted for (by CLIN if necessary), and unallowable costs should be segregated from allowable. Indirect cost rates should be calculated and costs allocated. Timekeeping and labor distribution should track employee efforts by the project/task they work on. The books should be closed monthly and reviewed by management. Of course, there may be more to consider for your business -- but these areas are key.
Your documentation should be in the form of an accounting system manual with appropriate policies and useful procedures which are tailored to your operation. Your accounting manual cannot be a fill in the blanks template. It should describe your general accounting policies, chart of accounts, indirect rate model, the software/tools you use for accounting, timekeeping, and payroll and the procedures followed using those. There should also be an attempt to provide for segregation of duties, as well. The bookkeeper, for example, should not be approving vendor bills, entering them into the accounting software, deciding which bills to pay and then sending bill payments to vendors. The bookkeeper should enter bills into the accounting system and may send bill payments. But the owner should approve vendors bills and decide which ones should be paid.
Finally, your accounting system must be maintained. This requires the regular review of reports, updates when rules or standards change and other ongoing activities. The accounting manual is a good example of maintenance. It must be updated for changes in accounting standards, e.g., ASC 606 (Revenue Recognition) and ASC 842 (Leases). Your accounting manual should be the basis for DCAA compliance as it relates to your business. It should make compliance easier and be somewhat of a living document. It cannot be something that is created but then put away in a drawer and hardly consulted.
DCAA compliance is a process. It should be thought of as any other strategic goal and resources need to be dedicated toward its accomplishment and ongoing maintenance. Without an adequate accounting system, receiving federal awards will be nearly impossible. Even if you get an award, one day the auditors will come and you must be prepared. The best time to start with DCAA compliance is before you get your first contract, but any time is better than not at all.
Do you have questions? Please feel free to email me.
Disclaimer: This blog post is for general informational purposes only. Blog posts cannot substitute for useful accounting, tax or legal advice, which can only be obtained from consultation with an accountant, attorney or other qualified professional considering the specifics of your business/situation. All information on the blog is provided in good faith, however, there is no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, availability, completeness, reliability, or validity of information shared via blog post, comments, etc. The views expressed on this blog are solely those of the author(s) and do not necessarily reflect the views of JAS MAS LLC dba Acounten.
