The federal government agency tasked with the auditing of Department of Defense (DoD) Contacts is called the Defense Contract Audit Agency (DCAA). However, other organizations within the government can bring in the DCAA to handle accounting and financial audits. These contracts are so highly regulated because they are worth a lot of money and that money comes from taxpayers within the United Stated.
A DCAA audit benefits both taxpayers and the government so be sure your organization is compliant when working with government contracts. All of your business processes must fall within the DCAA’s strict requirements.
The Importance of DCAA Compliance
Contractors who work for the government are expected to follow very precise guidelines concerning the funds granted to perform work for the Federal Government. In exchange, the government body guarantees that they have adequate funding to complete the project. It’s a balance that ensures ethical practices on both sides.
Government officials carry out audits on a contractor’s financial accounts to ensure that all of the costs within a contract are authorized, allocated correctly, and spent reasonably. In order to understand the importance of DCAA compliance, let’s dive deeper into what it means.
When a company is deemed as DCAA compliant, it means that they follow all of the procedures laid out by the agency. A DCAA compliant company will be ready to be audited at a moment’s notice.
DCAA Audit Specifics
A DCAA audit is designed to analyze financials within the contractor. It looks closely at items like direct cost to allowable cost, direct cost pools, and indirect cost pools. With that said, there are different types of DCAA audits that tend to encompass factors like:
Let’s take a closer look at each of these audits.
Forward Pricing
This type of DCAA audit is done before the contract begins. During a forward pricing audit, the DCAA takes a close look at the cost of goods and services proposed by the contractor.
Special Audits
The DCAA will conduct special audits before and after the contract is awarded. Contracting officers issue specific requests an independent financial opinion on specific elements of the company’s accounting system. Contract work is halted while this audit is processed so your company needs to be prepared ahead of time just in case.
Incurred Cost
The DCAA checks the accuracy of the contract’s cost representation. This normally occurs when the contractor charges a non-fixed price. It’s carried out after the company is granted the contract to verify that the costs are reasonably justified.
Pre-Award Survey
The pre-award survey is designed to allow DCAA to get an understanding of the accounting system used by the contractor. You must be able to showcase your accounting process and its implementation to the auditor before any costs are allowed on the contract.
What Happens if a Contractor is Noncompliant?
Companies that don’t have a proper system in place will have to face certain consequences if they are audited. Make no mistake; an audit will catch any of these inconsistencies. Unethical business practices will get punished. Here are a few of the consequences of being found in noncompliance.
Face Civil or Criminal Penalties – or Both
The government can and will exercise their right to retrieve funds if they find a contractor in noncompliance. The fines can reach up to three times higher than the initial contract. This is just the civil side of the equation. The criminal side is much worse. Illegal activity can lead to imprisonment and fines for the individual who signed the certificate.
Debarment
This is considered one of the worst penalties an organization can incur when working with the federal government. Organizations that are found committing fraud or violate antitrust laws will be banned from bidding on all future contract. This carries over between all government sectors and the size of the contract being violated doesn’t matter.
Voided Contract
Certain violations will lead to the contract being voided. This includes violations such as bribery or conflict of interest. Once a contract has been voided, it can make it difficult to win future proposals with all sectors of the government.
Businesses Must Ensure They Are DCAA Compliant
As you can see, being found in noncompliance leads to a host of other problems. If your business is in a field that might subject it to a DCAA audit, then it’s essential you take the proper steps to ensure DCAA compliance. This protects your business and keeps projects on-track.
Make Sure your Accounting System is DCAA Compliant
Your accounting system must be fully compliant with the vast requirements set forth by the DCAA to guarantee smooth audits. DCAA-compliant accounting systems deliver accurate information, have quality control built into the processes, and are capable of quickly generating reports for audits.
Older accounting systems will fall out of compliance so your organization should perform annual checks to ensure they remain up-to-date. When updating your accounting system, include features designed specifically for government contracting. Fortunately, there are a lot of solutions designed specifically to meet this goal. Here are some essential components of a DCAA compliant accounting system:
Ensure your Labor System is DCAA Compliant
An accounting system is only as accurate as the underlying labor data. Therefore, it’s essential that you incorporate a strong labor tracking system into your accounting process. The FAR rules that are used to administer labor are extensive so review your labor system to ensure it meets these requirements.
Timesheets must be documented either on paper or by electronic means. They are to be completed daily by workers and then signed off on by supervisors. All labor must be easily identified by contract.
During a DCAA audit, you will have all labor costs reconciled against payroll and labor distribution records. Keep this in mind when fine-tuning the labor system.
Constantly Review and Update Practices to Ensure DCAA Compliance
Policies, processes, and standard business practices should be reviewed and updated regularly to ensure DCAA compliance. In fact, lack of a review process is the most common cause of noncompliance. Rule concerning government contracts change quite a bit so regular reviews help ensure that your processes remain up-to-date.
Challenges Faced by Small Businesses
Having access to the information is not enough. It’s important that organizations working with government contracts employ an expert in DCAA compliance. At the very least, the internal staff should be trained in DCAA specifics. This is the biggest challenge for small businesses since their resources are limited.
Another challenge is the cost of keeping an accounting system up-to-date. Accounting software that’s designed specifically to meet DCAA requirements tends to be pricy. Small businesses might need to adapt more common accounting software to meet DCAA compliance requirements. This is why having skilled professionals is essential. They can develop DCAA-specific processes within common systems like Quickbooks and Procas.
Final Thoughts
DCAA compliance is not a recommendation, but a requirement to provide services to the Federal Government. It is essential to long-term success. Not following the right process will result in severe penalties. Setting up a DCAA compliant accounting system requires an investment of time and money but the long-term risk of not having a system in place are too high to ignore.
