Rose Report: Issue 22

Navigating DCAA Audits

issue22-pic-story1Many contractors have misconceptions about what it means to be DCAA compliant. “Sometimes there’s a misunderstanding,” says Jeanne McMillen, a partner at Rose Financial Services. “Contractors say, ‘I have software that’s DCAA compliant, therefore I am compliant,’ but that’s just the starting point.”

In reality, DCAA compliance involves three layers: software, policies, and processes. We wrote about finding the right software last month. The second layer involves creating company-wide policies—described step-by-step in a manual—that tell employees how to perform their jobs in accordance to the contract terms. And then there’s the final layer—correctly and efficiently putting those policies into place through standardized processes.

All contractors should have processes in place for recording time and billing in accordance with contract terms. Part of the billing process should include performing an annual reconciliation of provisional to actual rates for cost-type contracts.

Just as important, there needs to be processes for internal controls and reviews. It’s key that billings and time be approved by a manager. If a mistake is found—for example employees are billing projects to the wrong task number—managers need to not only fix the mistake but go back to the source and make sure the underlying miscommunication that caused the mistake is resolved.

When the DCAA comes in to audit a contractor’s accounting system, they may perform a floor check where they physically walk around and ask people what they are doing—that’s how they verify that you are correctly following the policies laid out in your manual. For example, the policy may be to bill monthly. But to ensure that a company is following that policy, the auditor may ask the staff what specific steps they follow when recording time worked on a given project. Keep in mind that these floor checks can be unannounced—as such, it’s vitally important to make sure that processes are followed day in and day out.

At the end of the year, it’s smart to perform an internal review that ensures your processes are working efficiently. Larger companies may hire an external consultant to perform this review while smaller companies may do it in-house. Either way, any changes that are made should be reflected in the policies manual.