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How to Prep for a DCAA Audit

As a government contractor, you can be subject to several DCAA audits. Failing to pass one of them can put your company's reputation in the GovCon community at serious risk.  

Familiarizing yourself with DCAA auditing standards and structuring your business to remain compliant with various requirements can be tricky. Knowing how to prep for a DCAA audit can eliminate the risk of failure, keeping your company competitive in the GovCon sector.

In this article, the GovConPay team explains how to prepare your business for a DCAA audit and remain compliant with the necessary regulations and guidelines.

3 DCAA Audits to Prepare for

While your business may face multiple pre-award and post-selection audits, we will focus on three core DCAA audits that warrant serious attention.

Accounting System Adequacy (SF 1408)

Before awarding a contract, the government needs to evaluate the design of your accounting system. This is done to make sure that it meets the necessary guidelines for GovCon purposes.

You need to prepare for this audit if your contract is:

  • Cost-reimbursement
  • Cost-sharing
  • Cost-plus-incentive-fee
  • Cost-plus-award-fee
  • Cost-plus-fixed-fee
  • Fixed-price or Time & Materials with cost-reimbursable line items

To pass the audit, your accounting system should be adequate and approved by the government under FAR Subpart 16.3. By arranging this audit, the government makes sure that it's only paying direct costs of the contract and a reasonable share of the contractor's indirect costs.

Real-Time Labor Evaluations (Floor Check)

The purpose of this DCAA audit is to test the integrity of your timekeeping system. The goal of a timekeeping system for a government contractor is to make sure that labor costs are accurately and timely identified in the accounting system.

Since, in cost contracts, the labor costs are billed directly to the government, it needs to make sure your timekeeping system is in top shape. In short, you have to show that your staff is actually working and following the right timekeeping requirements.  

This DCAA audit uses the element of surprise as you won't be notified about the floor check in advance. The auditor selects employees randomly to conduct interviews and check timesheets. 

Incurred Cost Submission

The purpose of an incurred cost submission is to establish the final annual indirect costs rate and determine over/under billing for a given period. The submission includes direct and indirect costs incurred by the contractor during the fiscal year.

According to the Allowable Cost and Payment clause  FAR 52.216-7, a contractor must submit an adequate final indirect cost rate proposal to the contracting officer and auditor within six months of the conclusion of each fiscal year.

The government conducts an incurred cost submission audit to receive sufficient information for either accepting the proposed contractor's final indirect rates or making adjustments to close the contract for final payment.

How to Prep for a DCAA Audit

While DCAA audits may seem intimidating, if your business follows the necessary guidelines, it's likely to be fully prepared for all of them.  

1. Stay Prepared so You Don’t Have to Get Prepared

By adopting a "stay prepared to be prepared approach," you don't have to worry about surprise checks, lack of proper documentation, failed employee interviews, incorrect calculations, and the like.

When working with the government, businesses need to keep close tabs on the requirements. Meanwhile, it's important to have a clear understanding of which DCAA audits your business may face. By the time you receive a notification, you must know exactly what to expect from the process.

2. Be Thorough With Time, Expenses, and Project Information

When entering a contract, the government is extremely thorough. You should be too. When preparing documentation, make sure to be accurate with time reports, expense reports, and project information. It's always better to add more details than necessary instead of leaving something out.

While working on the documentation, take the time to prepare your employees for DCAA audits. Besides keeping their timesheets in top shape, your staff should know what to expect from surprise floor checks and interviews.

3. Align Your Accounting System

When working with the government, you need to make sure that your accounting system is fully compliant with DCAA requirements. In addition to keeping your accounting system and budget planning in good shape, you need to stay on top of the regulations.

Be proactive about aligning your accounting system with DCAA guidelines. This can keep you from worrying about audit results.

From segregating direct costs from indirect costs to maintaining an adequate timekeeping procedure, creating a DCAA-compliant accounting system requires a variety of tools. Helping them work together requires a serious approach to integration.

GovConPay's compatibility with such ERP systems as Deltek, Unanet, Aspire, and Jamis makes it easier to keep your account system ready for DCAA audits.

4. Ensure Proper Reporting Capabilities

Financial reports are an integral part of the government-to-contractor relationship. To be ready for any audit, you need to set up a system that generates the necessary reports (e.g. indirect cost report) timely.

Proper reporting makes the auditor's job easier, speeds up the process, and sets you up for a successful audit. A DCAA-compliant reporting structure isn't just necessary to pass the audit. It can streamline your work operations and ensure their compliance with the government's expectations.   

Prep for a DCAA Audit and Pass with Flying Colors

A DCAA audit shouldn't be something you fear or hope to avoid. By implementing the right approach to preparations, it's possible to pass any audit without excessive effort.

DCAA audits are an integral part of the government-to-contractor relationship. By fitting them into your vision of the company's daily work operations, you take the anxiety out of the equation.

Access to the right tools is essential to creating a DCAA-compliant environment and staying on top of all the requirements. By working with a DCAA-compliant ERP system, you can be prepared for an audit at any time.

GovConPay is created specifically for government contractors and helps you fortify your ERP system to ensure 24/7/365 conformity.  For more information, please contact us at any convenient time.