What Does It Take to be DCAA Compliant? 5 Things You Need to Know

As a government contractor, maintaining compliance with the Defense Contract Audit Agency (DCAA) is crucial for the success of your business. The DCAA is responsible for auditing and evaluating government contracts, and ensuring that contractors are adhering to strict regulations and accounting principles. Non-compliance can result in serious consequences, including contract termination and financial penalties. For those reasons, it is essential for government contractors to have a solid understanding of what it takes to be DCAA compliant.

The Purpose of DCAA

The DCAA was created to oversee the financial management of contracts issued by the Department of Defense (DoD). Its primary mission is to ensure taxpayer dollars are spent appropriately and efficiently while protecting the financial interests of the government. By implementing DCAA standards, your company is not just ticking a box; it is contributing to a system designed to maintain integrity and financial accountability in the defense industry.

DCAA compliance requires regular reporting of your financial activities. This includes:

• Annual budgets
• Accurate and up-to-date income statements
• Balance sheets and cash flow statements
• Job cost reports
• Contract status reports
• Variance reports

Being proactive with your financial reporting will not only keep you in compliance but also provide valuable insights into your company’s financial health.

Below we will break down five crucial elements of DCAA compliance, and explain the key elements that every executive of a government contractor needs to know.

1. DCAA Accounting System Requirements

One of the fundamental requirements for DCAA compliance is maintaining an adequate accounting system. The DCAA places significant importance on contractors having a reliable system that accurately captures and records financial transactions related to government contracts. Some key elements of a DCAA-compliant accounting system include:

• Segregation of Costs: Properly segregates direct costs and indirect costs to ensure correct allocation and avoid unallowable costs being charged to government contracts.
• Timekeeping System: Implements a robust timekeeping system to accurately track and record labor hours spent on each contract or project.
• Cost Accumulation Methods: Uses acceptable cost accumulation methods for direct and indirect costs, ensuring consistency and reliability.
• Cost Allocation Basis: Uses an appropriate basis for allocating indirect costs to different contracts, such as labor hours, labor dollars, or machine hours.
• Unallowable Costs: Identifies and excludes unallowable costs as defined by the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS) from government contract billings.

2. Timekeeping and Labor Compliance

DCAA places significant emphasis on timekeeping and labor compliance. Proper documentation and accurate recording of labor hours are crucial to demonstrate government contract work is being performed efficiently and within budget. Contractors should ensure the following:

• Compliance Training: Regularly providing training to employees regarding DCAA timekeeping requirements and the importance of accurate time recording.
• Audit Trail: Maintaining a detailed audit trail that shows the progression of labor hours from the initial timesheet to final integration into the accounting system.
• Overtime and Leave Records: Accurately tracking and documenting overtime hours, holiday pay, and leave time to avoid overcharging government contracts.
• Direct vs. Indirect Labor: Clearly distinguishing between direct labor (work performed directly on a specific contract) and indirect labor (work that supports multiple contracts) to avoid misallocations.

3. Cost and Pricing Data Compliance

Contractors are required to submit cost and pricing data to the government when bidding on certain contracts. This data is used to negotiate fair and reasonable prices. Contractors must ensure:

• Accurate Data Submission: Verify the cost and pricing data submitted is complete, current, and accurate. Any errors or omissions can lead to compliance issues and potential contract disputes.
• Internal Controls: Implement internal controls to review and validate the accuracy of cost and pricing data before submission.
• Consistency and Transparency: Maintain consistency and transparency in pricing methodologies and justifications to ensure compliance with Truth in Negotiations Act (TINA) requirements.

4. Incurred Cost Submissions

Government contractors are required to submit annual Incurred Cost Submissions (ICS) to the DCAA, detailing the actual costs incurred on government contracts during the fiscal year. Contractors should ensure:

• Timely Submissions: Always submit ICS within the required time period (usually six months after the end of the fiscal year) to avoid penalties and interest.
• Compliance with ICS Adequacy Checklist: Review the DCAA’s ICS Adequacy Checklist and ensure all required documentation and schedules are provided.
• Supporting Documentation: Maintain well-organized and complete supporting documentation for all costs reported in the ICS to facilitate the auditing process.

5. Independent Internal Reviews

Conducting independent internal reviews is an effective way to identify potential compliance issues before the DCAA conducts their audit. Contractors should ensure:

• Regular Compliance Audits: Performing periodic internal audits to assess the company’s compliance with DCAA requirements.
• Responsive Corrective Actions: Addressing any deficiencies or non-compliance issues promptly and implementing corrective actions to prevent recurrence.
• Professional Assistance: Engaging with accounting and legal experts experienced in DCAA compliance to ensure the accuracy and effectiveness of internal reviews.

Achieving DCAA Compliance

Achieving and maintaining DCAA compliance is a complex but essential aspect of government contracting. By understanding and implementing the key elements discussed here, government contractors can position their organizations for success in the federal marketplace.

Compliance is an ongoing process that demands dedication and attention, but the rewards in terms of contract opportunities and credibility with the DCAA are well worth the effort.

Professional Assistance and Training

Navigating the complexities of DCAA compliance requires specialized knowledge and expertise. Contact us if you have questions or need training for your employees regarding DCAA requirements. We are ready to guide you through this intricate process to make DCAA compliance manageable and beneficial for your organization.