What Does It Mean To Be DCAA Compliant?

Any organization that seeks success from the defense contracting industry must strongly adhere to the highest levels of organization, security, accountability, and financial management. The government ensures defense contractors adhere to these high standards by complying with Defense Contract Audit Agency (DCAA) audits.

To be DCAA compliant means that the organization has the systems and procedures in place to pass a DCAA audit. There is no certification they issue or any formal statement of compliance. Instead, DCAA checks to make sure your organization meets government rules and exhibits financial management behavior that meets rigorous government standards. These standards exist because when the government uses money for any purpose, they are responsible for explaining how that money is used, and through DCAA accounting system requirements, they transfer part of the responsibility to the entities that receive government contracts. For example, when your business is awarded a government contract, your management processes need to be able to fully document how contract money is used and the results these funds achieve. This means the accounting system you use must be flexible, secure, and comprehensive.

DCAA audits are a critical requirement for many of our clients. This blog will examine what an audit means and how a business can use it to improve other processes.

What Are the 12 Key Elements of a DCAA Audit?

An accounting system is much more than something you download or install from packaged computer software. It encompasses all the technology, people, and processes you use to record and report information. The funds the government provides from the contract will go through this process, and a DCAA audit is their way of making sure these elements are able to meet their requirements. DCAA audits serve a number of purposes depending on the system that needs to be audited, including contractor purchasing system review (CPSR), benefits and compensation, pre-award audits, and special event planning and execution.

Here is what a DCAA compliant accounting system needs to be able to do:

Separate costs from indirect costs – This means the contractor must have a policy defining the characteristics of a direct cost and an indirect cost. The accounting system must have separate accounts for each cost element in significant detail for audit. Finally, the direct costs must be separated from indirect costs in the accounting system.

Job costing systems – For every direct cost transaction, a job or project number must be assigned, and a separate ledger must be maintained.
Employee timekeeping – An adequate timekeeping system is one that separates hours not only by day but also by the project.

Accounts payable systems – All expenses and payables reports must be compared or reconciled each accounting period.

Unallowable accounting requirements – The accounting system must comply with FAR 31.201-6 that governs how unallowable cost accounts are recorded and reported.

Certain direct and indirect costs – The accounting system needs to be able to allocate costs by job, and comparisons need to be made between job cost systems and the general ledger each accounting period.

Meet GAAP – All accounting systems should be designed to meet generally accepted accounting principles (GAAP) which means the system should be accrual-based instead of cash-based.

Capture pre-contract costs separately – Costs incurred before the effective date of a contract need to be segregated from other contract costs and controlled.

Maintain indirect cost pools – The system must define indirect cost accounting practices in a policy that is consistently followed and easily reported.

Track costs by contract line item – This includes charging direct costs to line items and allocating indirect costs to contract line items.

Record and accumulate costs monthly – This is a common practice for most entities, but monthly reporting should include direct and indirect costs.

Provide reliable historical accounting data – If all other requirements are met, recording and reporting should be automatic and secure.

A DCAA Audit Is Not Simply a Test To Pass—It’s an Opportunity

If you approach a DCAA audit as an obstacle or a waste of time, you are missing the real opportunity it provides. While the main purpose of passing an audit is to meet government standards, DCAA accounting standards are also a way to make sure your accounting systems are modernized and efficient.

DCAA audits might be overwhelming, but Rubino audit services make it simple. We work closely with contractor clients to not only ensure they can meet DCAA audit requirements but also that their accounting system is strong, simplified, modernized, and entirely adequate for their needs.

If you are facing a DCAA audit or if your business wants to land lucrative defense contracts, call us today and speak with our financial experts.