What is DCAA Compliance?

Does your business work with the U.S. government, or are you considering diving into that pool? Here’s a four-letter acronym you need to know — DCAA. It stands for the Defense Contract Audit Agency, and while it may not be the flashiest part of government contracting, it’s the one you ignore at your peril. Ensuring compliance with the DCAA is critical for winning and maintaining government contracts.

Do you understand exactly what DCAA compliance is? Let’s explore this gatekeeper to successful GovCon, key requirements and how you can successfully navigate these stringent regulations.

Understanding DCAA

The DCAA is responsible for auditing companies that do business with the Department of Defense (DOD). But don’t let the “defense” in its name fool you because it also influences audits for other federal agencies. The DCAA’s mission is to ensure contractors follow federal regulations and spend taxpayer money wisely. It conducts audits to verify that costs are:

Allowable: Your organization charges for what is permitted under the Federal Acquisition Regulation (FAR).
Reasonable: Your business is not inflating costs like popcorn at a movie theater.
Allocable: You charge the right contract or project and do not mix things up.

DCAA compliance means adhering to the set of standards and requirements established by the agency to ensure contractors manage and report costs accurately, transparently and in line with federal regulations. Compliance requires robust systems, processes and documentation to pass audits, which can happen during the bidding process, throughout contract performance and even after contract completion. Core requirements include:

Accounting System Compliance

The backbone of DCAA compliance is your accounting system. The DCAA requires a detailed accounting structure that can:

Segregate direct and indirect costs.
Track costs by contract and project.
Accurately record all financial transactions.
Ensure timekeeping and labor distribution are precise and supportable.
Provide audit trails for all charges.

To meet these standards, it is imperative that your organization’s accounting system uses DCAA-compliant accounting software that meets the Generally Accepted Accounting Principles (GAAP). Your business must also have clear policies and procedures that meet FAR requirements and provide accurate and timely financial reports.

Timekeeping and Labor Distribution

Labor costs are a huge part of government contracts, so DCAA audits focus heavily on timekeeping practices. Employees must record their time daily and include specific details like contract systems. Using automated systems can help with real-time results and reduce errors. It also ensures that labor costs are more accurately distributed to specific contracts or indirect cost pools.

Labor costs should also align with the work performed and the contract they relate to. This requires clear tracking of time forked, reliable documentation and, you guessed it, cost segregation.

Additionally, government contracts must adhere to wages determined by the Department of Labor (DOL), such as the Davis-Bacon Act. This policy ensures that GovCon construction projects pay employees the correct rates, confirming these with accurate timekeeping practices and certified payroll reporting to show adherence.

Conforming to Billing Standards

As a contractor, your company must prepare and submit invoices that align with DCAA standards. That means using the correct format, such as SF1043 or SF 1443, which is detailed in the contract. Your billing compliance also includes backup documentation for billed amounts, like receipts or timesheets, to align billing costs with all the incurred expenses tracked in your accounting system.

Billing standard conformation also includes indirect rate management. Your indirect costs should be allocated to contracts using rates like:

An overhead rate, which covers labor and materials costs.
General and administrative (G&A) rates that include legal fees and general business expenses.
Fringe benefit rates that include costs for employee benefits like retirement or health care plans.

Cost Estimating and Administration

During the proposal process, you must prepare cost estimates that are accurate, justifiable and realistic. DCAA auditors often review your pricing structures and their consistency with historical data.

As a contractor, your business must also keep detailed records and comply with specific requirements because post-award compliance is just as critical as pre-award preparation. These include submitting deliverables and reports on time, managing subcontractor costs and contracts, and monitoring any contract adjustments or modifications.

Types of DCAA Audits

The DCAA may perform a few different types of audits to double-check your business’s compliance. Your contracting officer may also ask for an independent financial opinion on anything from specific elements of your contract to your business system before or after your contract completion date. These will be categorized as “other” or “special” audits. Other types of DCAA audits include:

Pre-award surveys: Many small businesses are affected by SF1408, which evaluates your accounting system before you are awarded a cost-type contract.
Incurred cost: Incurred cost audits validate the costs your business bills to the government after you get the contract. It determines the accuracy of your cost representations.
Forward pricing audits: Before you get the contract, the DCAA will evaluate your business to check the accuracy of your proposal’s cost estimates.

How to Achieve DCAA Compliance

DCAA compliance is an investment in your company’s reputation that ensures your organization is paid on time, bypasses penalties and keeps your contract. To get and keep that government contract, get an accounting system tailored for government contracting.

Next, develop strong, clearly documented policies and communicate your business’s internal procedures on these. Train your employees according to these documents and ensure everybody understands their role.

However, the best advice on DCAA compliance is to get expert help. A third-party service provider with DCAA expertise can identify your organization’s areas of opportunity and help your business make the most of outsourcing HR and accounting by:

Streamlining accounting systems: The right service provider can suggest managed accounting systems, accounting system implementations and GSA schedules.
Training your teams: This will help ensure your employees understand their new timekeeping systems, cost segregation and labor tracking.
Helping you prepare: Your service partner will conduct mock audits to identify areas where you need to up your game before the DCAA comes knocking.
Saving you time: Partnering with the right company will allow your business to remain compliant. They will manage the red tape while you and your employees focus on the tasks the contract wants most.

Get DCAA-Compliant With BOOST LLC

The DCAA ensures government contractors are not overpaid or charged for services that should not be on their bills. This audit may seem intimidating, but it’s a necessary checkpoint. Remember that government contracting is about more than following one set of rules — it’s about juggling multiple regulations. The best way to stay on top of these requirements is to partner with someone who understands GovCon needs.

At BOOST LLC, we specialize in everything GovCon, giving us expert insight into government accounting requirements. Our specialists will evaluate your current system and give you recommendations on how your business can get compliance status through cost-effective solutions. When you partner with BOOST, you get informed insights that are updated with the latest government regulations, the support your organization needs to grow and maintain compliance, and even assistance with your FAR compliance and payroll.

What Is DCAA?

Understanding DCAA