The Complete Guide to DCAA Pre Award Audits: An 8 Point Readiness Checklist
What Exactly is a DCAA Pre Award Audit?
A DCAA pre-award audit is a mandatory requirement for all defense contractors awarded cost reimbursable contracts. It is designed to assess the contractor’s ability to properly account for contract costs, and it is conducted before any contract funding has been released. A pre-award audit is not a full, detailed audit of the contractor’s accounting system.
What is the Purpose of a DCAA Pre Award Audit?
The purpose of a DCAA Pre Award Audit is to provide the government with an audit report that helps determine whether or not a contractor is qualified to be awarded a contract.
The audit considers the company’s accounting system, including relevant accounting policies and procedures.
The Defense Contract Auditing Agency (DCAA) is a United States Government agency that provides independent, objective audits of DoD contracts to help measure the effectiveness and efficiency of contractor performance and verify compliance with government regulations.
The DCAA also assesses the impact of subcontracting on prime contract prices, and participates in investigations into fraud and abuse related to defense contracting. In this way, the DCAA enhances public trust in defense contracting by providing independent oversight of DoD’s contracts.
DCAA Compliance Checklist
The following checklist is designed to help contractors identify and correct deficiencies in their accounting and internal control systems.
In the below checklist, we’ll show how to pull this information from QuickBooks so you can begin to prepare for the auditor.
Checklist Item #1 – Chart of Accounts
One of the first things to do is establish accounts that will keep track of your company’s income and expense in a Chart of Accounts.
The sequence in which you post your financial transactions is important. You’ll have to identify and separate direct, indirect, and unallowable expenses as well as track the indirect rates for fringe, overhead and general administrative costs.
The Defense Contract Audit Agency (DCAA) examines the Chart of Accounts to verify an entity is following Generally Accepted Accounting Principles (GAAP). Having a section for accounts such as Accounts Payable, Accounts Receivable and Prepaid Expenses shows that the company is following this standard.
Checklist Item #2: Trial Balance
Print a Summary Trial Balance or a Working Trial Balance. The summary trial balance summarizes the debits and credit balances on each of your accounts, the working trial balance contains more details like the opening balance, transactions, transfers and closing balance. The auditor will want to see this.
Checklist item #3: General Ledger Detail
General ledger detail permits you view an account’s balance changes over a certain period. This is helpful to understand the detailed transactions flowing through the account.
Checklist item #4: Profit & Loss by Job
A common requirement for a pre-award survey is the accounting system’s ability to accumulate costs by project. A Profit and Loss by Job report that agrees with the standard Profit and Loss (P&L) report should give confidence that this can be accommodated.
Checklist item #5: Labor Distribution Report
Labor distribution can be defined as the process of allocating labor costs, including both direct and indirect costs, to final cost objectives based upon the total time recorded on timesheets.
To manage labor you’ll need to set up employee salary data, as well as customize the system with items for all forms of labor – paid time off, holiday, maternity leave and more. Check the account mappings for each type of labor cost so all labor expenses are posted to the appropriate general ledger accounts.
It is a good idea to separate cost categories so that you have direct labor for government contracts, direct labor for commercial contracts, overhead for government contracts and overhead for commercial contracts if there are substantial differences in costs.
Checklist item #6: Contract Backlog Report
A contract backlog report demonstrates how much of the contract funding has been consumed, and how much funding remains on a contract. It also demonstrates whether there could be a potential contract cost overrun, and if there are corrective actions required as a result.
Checklist item #7: Rate Calculations
When developing rates for your proposals, you’ll need to provide some justification for the calculations you are proposing. You should use past data and trends from a budget to show that the charges you’re suggesting are reasonable. You may need to use historical data to estimate future rates. Out-year rates can be calculated using reasonable sales forecasts and costs.
Checklist item #8: Monthly Close Checklist
The auditor will want to understand in detail what processes you use to detect errors and make sure the true financial position of your business is accurately reported on.
Every month-end or period-close, you need to record transactions, verify account balances and reconcile reports. Done well, these processes will point out any errors in your accounting system and other financial or business issues.
Every Potential Defense Contractor Should Care about Getting Audited by the DCAA
In order to become DCAA audit compliant, you will need to devote time and attention to your accounts. You also need to be knowledgeable about relevant regulations, so that you set up your Chart of Accounts correctly and configure your accounting system correctly. Our qualified accounting professionals will help you prepare for any DCAA audit.
Contact us now to resolve any DCAA compliance issues BEFORE they begin.