The Defense Contract Audit Agency (DCAA) is an agency of the United Stated Department of Defense and is the primary audit agency on financial and accounting services in connection with negotiations, administration and settlement of federal contracts and subcontracts. Some key facts:
It was established in 1965 to perform all contract audits for the Department of Defense. Previously, the various branches of military service were responsible for their own contract audits. Oversight of 9,000 contractors every year and averages more than 3,400 audit reports which examine more than $350 billion of contractor costs Approximately 4,600 employees located at over 300 offices throughout the United States and overseas Audits span entire contract life-cycle from pre-award through contract close-out Ultimately DCAA plays a critical role in protecting federal government and taxpayer interests through audits that review contractors’ pricing, billing, and processes to determine if contractors are responsible custodians of federal funds provided to them through their contracts. The variety of audits performed by DCAA include:
Annual Incurred Cost
Real time labor and material
Estimating Government Property Earned Value Management System (EVMA) Material Management and Accounting System (MMAS)
Provisional billing rates/vouchers
Truthful cost or pricing (“Defective Pricing Audits”)
Special Contracting/Award Officer Requests
Final Vouchers Termination
What Contractors Need to Be Aware Of: Lastly, contractors must be aware of the significant enforcement mechanisms and remedies available to the federal government should non-compliance be asserted. Enforcement mechanisms range from the minor to massive, including but not limited to:
The consequences of non-compliance can be highly punitive and are subject to the materiality of the non-compliance. For this reason, audits are performed based on the risk profile of a contractor and the contract(s) under which they perform. As such, contractors must have a competent understanding of the contractual requirements and audit interests that accompany them prior to, during, and after contract performance to ensure their ability to demonstrate compliance with applicable contract requirements to the satisfaction of DCAA, or other federal audit interests. Given the variety of audit interests DCAA serves, it’s critical that a contractor perform contract briefs and retain documentation of applicable requirements and establish processes and policies that facilitate compliance with applicable requirements.
What Does it Mean to be DCAA Compliant?
It means that your organization is prepared to demonstrate compliance with the areas of audit interest DCAA is responsible for. The reality is there is no true definition for “DCAA Compliant”, as DCAA is simply the audit agency that performs the audits and beauty is in the eye of the beholder (e.,g auditor). The myriad of compliance requirements are broad, but 2 primary areas of DCAA audit interest that must be considered are Accounting and Estimating & Pricing. They are significant, routine audit interests of the federal government and DCAA and must be properly understood to ensure compliance throughout your contract lifecycle.
Accounting System Compliance
Success in the government contracting industry hinges heavily upon meeting compliance regulations. To be a successful government contractor, your business processes need to be Defense Contract Audit Agency (DCAA) compliant. Being able to successfully complete a DCAA audit not only ensures the legality of your operation but also helps you continue acquiring government contracts. You can make your life easier and guarantee smooth audits by using accounting software optimized for DCAA compliance. In a nutshell, being DCAA compliant means that the organization simply has systems and procedures in place to comply with the DCAA audit. The DCAA doesn’t certify or award a formal statement that your business is DCAA compliant. Instead, DCAA audits check if your organization meet Cost Accounting Standards (CAS), Federal Acquisition Regulation (FAR), and other government rules. To pass these audits, you must verify that your financial management and behavior meet the standards set forth by the DCAA. This means clearly documenting how you’re using the contract money, as well as the results achieved. To be DCAA compliant, you must prove that your finances align with their rules and regulations.
The Truth About DCAA Approved Accounting Software
While accounting systems can possess features that make them compliant with DCAA audits, there are no accounting systems that are formally approved by the DCAA. Even saying that a system is DCAA compliant just means it has features that meet the particulars of various audits. The DCAA doesn’t give accreditation or approval to these systems. Bear this in mind as you see advertisements declaring their accounting systems are ‘DCAA approved.’ They might be suitable for the DCAA audits, but they’re also trying to attract your business by claiming to be DCAA approved – hooking you with false information. The reality is that DCAA compliance is based on a combination of accounting practices and accounting software. No matter what software your team uses, you need to adopt policies and procedures that let you document your finances efficiently. To do this, the right accounting software is a major asset.
Overview of DCAA Compliance Accounting Features
The overarching themes in government contract accounting are transparency and detail. All the info involved with your accounting, from time-tracking to payables should have audit trail and drill-down functionalities. The burden is on the contractor to provide a complete record of all financial activities and amounts relating to the contract. For example, time tracking must be highly secure and detail oriented. The system must include timestamps for all entries and, if there are corrections, the approver must also have an approval time stamp included in the entry. Audit trail is highly valuable because this function allows you to have a straightforward data trail. All the processes and persons attached to contract-related transactions and ledgers are easily accessible and visible. With a system like QuickBooks Enterprise, the approval process can be configured around whatever stages you define, distinguishing approvals for any data records in the application. This approval process will also show an audit trail of who approved the record and when. These are details auditors must be able to examine and validate. Drill-down functionality is critical because you and the DCAA auditors need to be able to analyze the finances and breakdown specific data related to the contract accounts. It’s not enough to know the transaction amounts, your accounting software needs to be able to track and isolate the associated dates and activities involved. You also need to justify the time and costs spent on the contract. This means breaking down and analyzing the return-on-investment of these project finances throughout the contract’s lifecycle.
Make Sure You’re DCAA Compliant. Choose the Right Solution!
Remember, DCAA compliance isn’t an option in Federal contracting, it’s required. The last thing you need is to delay and/or jeopardize your entire contract. With the proper accounting software, your journey to compliance will be a lot easier and your position as a federal contractor will be more secure. In addition to having the key features you need to pass the DCAA audits, a flexible accounting solution will prove invaluable for managing your business. QuickBooks Enterprise offers a flexible, automated accounting solution you need to maximize your contract’s financial management.
Estimating & Pricing Compliance
When the U.S. Government buys goods and services from contractors it does so in a manner very different than the commercial space. Many acquisition vehicles and contract-types exist for the federal customer to buy its goods and services. The manner in which the U.S. Government procures goods and services will drive the estimating and pricing requirements associated with your proposal to the U.S. Government. Key risk factors effecting your proposal generally revolve around the area of the Federal Acquisition Regulation (FAR) the U.S. Government is using, specifically:
FAR 12 (Commercial) FAR 15 (Negotiated Contracts) Competitive Sole/single source, subject to certified cost or pricing
The provisions incorporated in your solicitation are driven by which part of the FAR the U.S. Government is using to acquire your goods or services. And those requirements vary significantly between each. Contractors must review their solicitations diligently to ensure they understand which provisions apply to them and which do not. In some cases, the estimating practices associated with a federal pricing action may be quite limited, such as a commercial or competitive procurement. In others such as sole source procurements subject to certified cost or pricing, the requirements are vast and include certifications to your pricing action that introduce risks such as defective pricing should your cost proposal not be compliant to the standard of certified cost or pricing. It’s essential that a contractor have this understanding during the solicitation phase and be prepared to comply to that standard upon proposal submission. Proposals subject to certified cost or pricing are routinely audited at the point of submission, as a prime and subcontractor, and carry longer-term DCAA defective pricing audit risks that all must be carefully understood by a contractor.