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What Government Contractors Need to Know About DCAA Guidelines

To stay afloat in the government contracting industry, it's imperative to learn all the necessary rules, regulations, and guidelines. With the competition in this sector being extremely fierce, compliance mistakes are out of the question.

When it comes to project estimates, costs, expenses, and hiring practices, government contractors are under serious scrutiny.

Regardless of your company's size or industry, DCAA guidelines require your close attention. By following them religiously, it's possible to stay on top of your game, ensure a long-lasting business relationship with the government, and avoid disastrous penalties.

In this article, the GovConPay team shares an overview of best practices to help you ensure DCAA compliance.

What Is the DCAA?

The Defense Contract Audit Agency (DCAA) is a government agency created back in 1965 to arrange audits and provide financial advice for government contractors.

Originally, the DCAA oversaw contracts for the U.S. Department of Defense. With time, it started working with all types of government contractors.

The DCAA is regulated, directed, and controlled by the Under Secretary of Defense (Comptroller)/Chief Financial Officer. The key goal of the DCAA's audit is to ensure that military personnel and American taxpayers receive good services for fair prices. These audits save the government about $3 billion annually.

What Is DCAA Compliance?

Many entrepreneurs in the GovCon sector mistakenly believe that DCAA compliance certifies that the government contractor is compliant. Instead, it means that the company's procedures and documentation are in order to pass the DCAA audit.

This audit assesses the contractor's compliance with the government's guidelines and regulations, including  Cost Accounting Standards (CAS), Federal Acquisition Regulation (FAR), and others.

In short, if a contractor is DCAA compliant, it is ready to pass the DCAA audit. The audit, in turn, checks for compliance with the government's requirements and regulations for its contractors.

DCAA Compliance and Small Business Contractors

To achieve DCAA compliance and pass the DCAA audit, small business contractors need to focus on the following:

1. Follow Accounting System Requirements

The DCAA checks if the design of your accounting system is acceptable for the government contract. To pass the audit, the system should:

  • Have a compliant cost structure (segregate direct and indirect costs, record pre-contract costs, etc.)
  • Provide policies that meet DCAA audit expectations (unallowable cost accounting, cost reporting, project accounting, invoicing, etc.)
  • Ensure proper timekeeping and labor accounting
  • Provide for Limitation of Cost and Funds/Invoicing Clauses
  • Offer cost reporting (DCAA demands certain reports that regular small business accounting systems don't provide like Indirect Cost Rate Statements and Contract Status Reporting)
  • While DCAA lists and explains all the accounting system requirements, it may take some time to get all the documentation and process in order for compliance purposes.

2. Prepare Contract Briefs

A contract brief is a summary of all related contract provisions. This document summarizes all terms, conditions, and requirements listed in the government contract.

Since it's imperative for a contractor to have a full understanding of its responsibilities, creating a comprehensive contract brief is mandatory. The brief can be updated throughout the duration of the contract.

3. Submit an Incurred Cost Proposal

If your company has at least one contract or subcontract that contains the FAR Clause 52.216-7 "Allowable Cost and Payment," you must submit an incurred cost proposal. The goal of the proposal is to define indirect rates and direct contract costs.

Incurred cost proposals must be submitted within six months after the end of the government contractor's fiscal year.

4. Monitor Subcontracts

The government contractor can't subcontract tasks automatically. The government must approve the subcontracting initiative. It's up to the contractor to monitor the subcontractor's work and ensure compliance.

The prime contractor is fully responsible for managing all subcontractors and submitting regular subcontract reports using eSRS (Electronic Subcontract Reporting System).

5. Ensure Price Proposal Adequacy

To ensure proposal adequacy, the contractor should go over the proposal adequacy checklist. The proposal cost elements include:

  • Direct Labor
  • Materials
  • Subcontracts
  • Other Direct Costs (ODC)
  • Indirect Rates

Overall, the contractor should be able to provide proper supporting data for its price proposal.

6. Establish Provisional Billing Rates (PRBs)

PRBs are used for interim payments to contractors in order to reimburse indirect costs incurred on cost-type contracts. PRBs need to be as close as possible to your final indirect cost rates for the fiscal year.

In short, PRBs are established based on previous audits or experience. You can submit a PRB proposal to the cognizant auditor (or administrative contracting officer) before the beginning of the fiscal year to get assistance with establishing provisional billing rates.

7. Create Public Vouchers

It's the contractor's responsibility to prepare and submit reimbursement claims according to the terms of the contract.

Public vouchers for reimbursements have to be prepared on government forms. During DCAA billing audits, auditors ask to provide the most recent vouchers and can give valuable advice on their format.  

8. Prepare for Real-Time Labor Evaluation

Real-time audits are usually unscheduled. The auditor can:

  • Analyze timekeeping practices
  • Interview employees
  • Observe the work process
  • Evaluate internal controls
  • Determine if labor charges are assigned to cost objectives properly

To make sure you are ready for a real-time labor audit, you need to keep current records as well as document internal controls and accounting systems.

Staying DCAA Compliant

DCAA compliance is an integral part of government contracting. Staying compliant requires an extensive understanding of the government's rules and requirements. While they look daunting, the DCAA guidelines don't require anything out of the ordinary. 

The key to passing the audit is staying on top of all the requirements, most of which are part of your everyday work process. GovConPay collaborates with the leading DCAA-compliant ERP systems that make DCAA compliance less daunting and more manageable. 

The GovConPay HCM solution is the first payroll and HR software dedicated to serving government contractors. For more information, please contact us at any convenient time.