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Defense Contract Audit Agency (DCAA) Compliance Overview for New Contractors


Federal government contracts can be a lucrative and stable source of income for your business. Due to competitive bidding rules, most domestic businesses have a chance at winning a contract as long as they make the best bid and prove they can follow through on it.

If you are seeking a contract from the Department of Defense or related agencies, keep in mind part of this process is demonstrating compliance with the Federal Acquisition Regulation.

The Defense Contract Audit Agency reviews contractors' compliance with FAR and other rules.

About the DCAA

The DCAA is a federal government agency acting under the Department of Defense. It acts as the government's auditor and advisor during the acquisition process and for administering contracts.

In addition to compliance checks, the DCAA reviews each contractor's business's financial stability to ensure it can complete a contract. DCAA also provides general guidance to contractors to help them better understand how to work with the government and DCAA auditors.

However, since it must act an independent auditor, the agency has limited ability to provide individualized advice to contractors.

Financial Capability Review

Before the government awards a contract, it requires confirmation that the contractor can complete it. The contractor must have the resources to purchase any needed inventory or equipment, and it must be financially stable with little risk of bankruptcy or other events that might affect its operations.

Depending on the agency with which you are bidding, the review may be performed by the Defense Contract Management Agency or the DCAA. This process is similar to when you are seeking an investment or loan for your business.

The government will request financial statements and forecasts as well as detailed information about your debts and other outstanding obligations.

The auditor's role is to ensure properly prepared, complete and accurate information, which will give the contracting officer a clear picture of your finances when evaluating your bid.

Pre-Award Accounting System Audit

The government will also evaluate your accounting systems to ensure they meet all applicable regulations. This audit is especially important for cost-plus type contracts because the government wants to ensure it is only billed for allowed costs. However, you must maintain a compliant accounting system regardless of the type of contract you are seeking.

The DCAA performs an initial review of your accounting systems during the Pre-Award Accounting System Survey. If the DCAA accepts your bid, it will also monitor your continued compliance with government accounting standards.

Accounting Compliance

Other than accuracy, the main purpose of government accounting regulations is to ensure properly segregated costs. You must separate the costs of your government work from non-government work; if you have multiple government contracts, you must allocate costs to each contract.

Within each contract, you must separate direct and indirect costs, allowed and disallowed costs, and any other cost categories specified by your contract. Indirect costs are costs that are not directly accountable to a cost object. Direct costs are costs that are directly accountable to a cost object.

The DCAA Manual and relevant regulations provide a general framework for your accounting system. The government's primary concern is the timely, accurate completion of necessary reports.

Within the general framework, you are free to choose your own software and establish your own processes that best meet your business objectives.

Cost Allocation

Federal regulations govern what costs may be billed to a contract, and your specific contract with the government should further clarify what costs are allowed. Consistent with the principle of cost segregation, there are three types of costs that can potentially be allocated to a government contract.

  • Costs that are incurred specifically for the contract
  • Costs that are incurred for both the contract and other work that can be reasonably divided between them
  • Costs necessary to the business's operations that do not have a direct relationship to specific work

Costs may include materials, supplies, building use, and labor. As with other costs, labor costs should be separated by contract and to specific objectives within each contract.

Reporting Requirements

Your obligation to report costs and other information will depend on the specific terms of your contract. At minimum, you must generate an internal interim report of the costs to be assigned to a contract at least monthly.

While best practice is to update most of the required data contemporaneously with each event, you will also need to reconcile your accounts and make any necessary adjustments to your cost allocations.

If your contract calls for progress updates or identification of costs by line item, take time to ensure these costs are appropriately reported.

The DCAA will review your accounting records to check that costs are properly allocated as allowed, per DCAA compliance. It also verifies your cost reports against your general ledger to determine whether the costs were actually incurred.

Approval of Services

The DCAA does not approve specific accounting firms or software tools as DCAA-compliant; instead, it makes an individual compliance determination for each contractor. You will not be approved or rejected due to your use or non-use of a specific service provider.

However, DCAA compliance is a time-consuming and complex task, especially if you have no prior experience dealing with the government. Working with a DCAA outsourced accounting service can save you the time and expense of having to build your own DCAA-compliant accounting system from scratch.

Acquiring a government contract is a big step! If you need assistance, our government accounting team can answer questions you may have about outsourcing your accounting.

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