Rose Report: Issue 11

The ABCs of DCAA Compliance

We’ve written about the Defense Contract Audit Agency (DCAA) and the various types of audits it performs in previous issues of the Rose Report. But there’s one big question we haven’t yet answered: What should a contractor do to ensure its accounting system is DCAA compliant?

When it performs a pre-award survey, the DCAA’s mission is to verify that a contractor has an accounting system in place that can accommodate the complexities of a cost reimbursable type contract. Since the contractor may never have had a cost-reimbursable type project before, it doesn’t need to show that the system is already operating; just that it’s designed to handle such work.

A contractor should expect that the DCAA auditor will inquire about policies and procedures—for instance, the auditor may ask the staff what steps they follow when recording time worked on a given project, since accurate time-keeping is key. A contractor must have formal processes in place for recording and approving time worked, as well as a method for making corrections to the record if an error—such as time getting charged to the wrong task—occurs.

The auditor will request certain reports and documents, such as financial statements, a chart of accounts, project reports, indirect rate calculations and payroll journals. They may also request to see a live demonstration of the accounting system. Finally, a contractor should be prepared to hand over a copy of its written accounting policies and procedures. It’s vital to have a manual that accurately documents these practices. Failure to provide the DCAA with adequate written policies and procedures is one of the most common reasons organizations fail the pre-award survey.

The DCAA is on the lookout for a number of criteria. The agency will look for an accounting system that is designed in accordance with GAAP and an accrual based accounting method. More complex than cash-based accounting, the accrual method allows the contractor—and therefore, the government—to have a clearer understanding of how the contractor is performing financially. The DCAA will verify that a contractor has monthly close-out procedures that allow it to accurately reconcile its financials. A contractor must also prove that a system has mechanisms to separate direct from indirect expenses, and allowable from unallowable costs.

One area where Rose Financial Services partner, Jeanne McMillen, says she often sees clients fall short is in their systems’ ability to monitor actual versus budgeted costs on a detailed, per-project basis. If a contract involves task #1 and task #2, for example, the DCAA will want to see that the contractor’s system can keep track of the separate budgets and actual costs for #1 and #2, both on a current and cumulative basis.

It’s vitally important to be well prepared when the DCAA comes to visit—not just because passing the pre-award survey is imperative to winning work—but also because it’s not easy for a contractor to get the DCAA to review its system in the first place. The agency has limited resources, so a contractor must take every precaution to ensure it makes the most of the opportunity presented when a DCAA auditor comes to visit.