Accounting & Tax Tips
October 10, 2023

Guide to DCAA Accounting Compliance: An Essential Tool For Government Contractors

If you’re a new business owner who has recently ventured into federal government contracting, or if you’re considering it, you’re likely already aware that winning a federal contract can open doors to numerous growth opportunities. While the ability to scale and expand is plentiful in government contracting, it also presents a unique set of rules and regulations. 

What is DCAA Compliance & Why is it Important for Government Contractors?

One critical aspect of government contracting is compliance with DCAA (Defense Contract Audit Agency) and FAR (Federal Acquisition Regulation) regulations. The DCAA monitors and audits contractual transactions with companies engaged with the federal government. 

Adhering to DCAA guidelines not only promotes transparency and accountability in your partnership with the government but also ensures you’re following the proper procedures to achieve your desired financial goals.

It is crucial for certain government contractors to abide by the DCAA rules and regulations. Any violation of these rules may have consequences, such as termination of contracts or even disbarment.

With our expertise and guidance in navigating the world of DCAA compliance, Wendroff & Associates can help you reach the financial success and rewards that come with government contracting.

Essential Components of a DCAA-Compliant Accounting System for Government Contractors

1. Proper Segregation of Costs

Separating business costs appropriately is essential for DCAA compliance. This involves distinguishing between direct costs, which can be traced directly to a project, and indirect costs, which are shared resources across multiple projects. 

Adequately allocating your indirect costs ensures that each government contract bears its fair share of your business’s operational overhead. This allocation is typically done using pools and bases, setting up cost groups, and distributing them based on logical allocation measures. 

Understanding and implementing these fundamental practices not only enables you to accurately estimate and track your costs but also ensures transparency in cost reporting—all crucial factors in meeting DCAA requirements and thriving in the field of government contracting. 

We’ve provided detailed steps on How to Create a Chart of Accounts for Government Contractors, along with a helpful video on how to import the government contractor chart of accounts into QuickBooks Online, and a downloadable Government Contractor Sample Chart of Accounts Template. 

2. Job Cost Accounting

Job cost accounting in DCAA compliance takes a granular approach to your business’s financial management. It includes employing contract-specific cost accounting practices—or treating each contract you’re awarded as a unique entity with its own financial ecosystem.

This level of detail is fairly specific to DCAA-compliant accounting and extends to recording cost data by individual project or task. It isn’t just about knowing what money was spent, but understanding where, why, and on which specific project or task it was invested. This kind of precise tracking system helps you maintain a clear, accurate snapshot of your financial performance on a project-by-project basis.

One of the most cost-effective accounting software programs is QuickBooks Online (QBO) for allocating revenue and expenses to a contract. QBO has a function called classes, which allows you to create contracts, jobs, or projects related to revenues and expenses. This is considered job costing for government contracts. Not only are you classifying revenue and expenses to categories such as services, rent, accounting, etc., but you are also classifying revenue and direct expenses to a contract or indirect expenses to an indirect class, which can eventually be allocated to a contract, job, or project. QBO has to be customized for this functionality – which is a service we provide to Wendroff & Associates clients. 

Lastly, the accumulation of costs should always fall under general ledger control. This means that every dollar spent and earned is accounted for correctly in your general ledger. These practices enable you to maintain solid financial records necessary for DCAA compliance and potential future audits.

3. Tracking of Allowable and Unallowable Costs

Another pivotal aspect of a DCAA-compliant accounting system is the ability to accurately differentiate and track allowable and unallowable costs. Developing an understanding of these costs is necessary for any government contractor, as it directly relates to the reimbursement of project-related expenses.

Allowable costs are those that can be reimbursed by the government because they align with the objectives and activities of the contract. 

Unallowable costs cannot be charged to the government, often due to regulatory or ethical reasons. For example, some common unallowable costs include: advertising expenses, alcoholic beverages, fines, and penalties.

Setting up a dedicated general ledger cost account for unallowable costs can help in segregating these expenses.

The Federal Acquisition Regulation offers more in-depth information regarding accounting for unallowable costs

4. Timekeeping

A well-documented labor distribution system for timekeeping ensures that employee hours and associated labor costs are accurately accounted for and charged to the applicable contracts. Having clear, efficient, and accurate timekeeping policies and procedures helps prevent labor mischarging.

Another important aspect of effective timekeeping is the need for stringent timecard approvals and audits. By following this procedure, all labor records are reviewed, verified, and approved by your leadership team on a regular basis and will withstand DCAA audits.

Having a functional time and billing software application is important to be DCAA compliant and for invoicing. QuickBooks Time is a great solution that helps your employees track their time by contract, project, or job. It also integrates time entries directly into QBO to invoice customers based on an employee’s hourly rates and the work they’re performing. 

Learn how Quickbooks Time makes compliance with DCAA timekeeping easier.

5. Consistency and Compliance with FAR and CAS

Government contractors must ensure consistency and compliance with the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS) to be DCAA compliant.

This process starts with being familiar with the regulations outlined in FAR and the 19 CAS standards. Maintaining cost consistency involves estimating, accumulating, and reporting costs and other regulations in the FAR and CAS guidelines.

It’s also important to be able to disclose your cost accounting practices and provide robust evidence of compliance. Regular internal audits and reviews can help ensure ongoing compliance with FAR and CAS.

Learn more about Best Practices for Implementing a DCAA-Compliant Accounting System.

Advantages of DCAA Accounting Compliance for Government Contractors

Adhering to DCAA-compliant accounting standards offers government contractors a host of long-lasting advantages. 

DCAA accounting compliance builds credibility and trust with select government agencies, which leads to an increase in opportunities for continued contract awards. 

Additionally, the reduction of audit findings and contract disputes is one of the most significant benefits of DCAA accounting compliance.

Cost accounting can provide more insight into how well you are performing financially on each contract since you will know your direct costs and allocated indirect costs to each contract. 

When your accounting practices are aligned with the government’s rigorous regulations, you’ll enjoy a greater sense of confidence, peace of mind, and future growth and success. 

Potential DCAA Accounting Compliance Issues for Government Contractors

Awareness of possible pitfalls is the first step toward navigating the complexities of DCAA accounting compliance. Here are some potential compliance issues to be aware of:

  • Inadequate segregation of direct costs, indirect costs, and unallowable costs
  • Non-compliance with tracking direct costs at a contract level
  • Irregular allocation of indirect costs
  • Labor mischarging
  • Inaccurate monthly calculations and monitoring of indirect cost rates
  • Non-compliance with Cost Accounting Standards (CAS) and Federal Acquisition Regulations
  • Failure to implement recommended DCAA accounting policies and procedures

Conclusion: The Role of DCAA Compliance in Government Contracting Success

Successful DCAA compliance involves three key best practices:

1) establishing, maintaining and communicating robust written policies and procedures;

2) implementing comprehensive employee training; and

3) regular internal auditing and monitoring with subsequent updates to your DCAA accounting practices. 

Compliance isn’t just meeting regulatory requirements—it’s a strategy for long-term business success with the federal government. 

By adhering to DCAA’s guidelines, you boost your credibility, mitigate the risk of audit findings, and enhance opportunities for ongoing government contract awards. 

At Wendroff & Associates, CPA, we understand that DCAA compliance may seem complex and confusing. We’re passionate about helping government contractors—from start-ups to mature businesses—navigate, automate, and streamline their DCAA accounting processes.

With our expertise and guidance, you’ll rest easy knowing you’re in capable hands—embracing the financial success that awaits in government contracting. Use the FREE CONSULT button today to discuss your DCAA compliance challenges.

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