DCAA compliance is a requirement for all government contractors. But for those just breaking into government contracting, DCAA compliance can be complicated to sort out—especially when it comes to your accounting methods. Proper accounting can be difficult for any business, but when your business must also ensure that it’s up to DCAA standards, things get tricky quickly. Here are just 7 of the key elements that make an accounting system DCAA compliant.
Separating Direct and Indirect Costs
Tracking costs is a part of any accounting system; but with government contracting, contractors are required to separate their direct costs from their indirect costs on every job. Defining direct and indirect costs can be a very confusing area to navigate, but at its core, direct costs are costs that go directly to a single project (materials purchased only for that project, hours worked directly on that project alone, etc.), and indirect costs are those incurred to run your business (rent on your building, vehicle upkeep, hours of your administrative staff, etc.). You must be able to track all of these types of costs separately, in separate accounts, and in significant detail.
Tracking Costs by Contract, Project, Task, and Objective
This means you must have an adequate job costing system that is integrated with your accounting system. Costs must be accumulated by cost element (labor, direct materials, consultants, etc.) and by project. For every direct cost transaction, a job or project number needs to be assigned, and a job cost ledge must be maintained by project. Finally, you must be able to provide a report that shows direct costs by cost element, contract, job, and/or contract.
Maintaining Your Timekeeping System
Because such detailed cost tracking is required, adequate timekeeping is also critical. Your timesheets can be physical or digital, but they must permit hours to be accrued by day and by project numbers. Your timekeeping system must also meet all DCAA preferences for time trackers, which includes:
- Recording all hours work and work completed every day, for every employee
- Security for identity and control of timesheets
- Requiring employee signatures on timesheets
- Requiring employee’s supervisor to approve timesheets
Note that these are just a few of the requirements for DCAA-compliant timekeeping.
Accounting for Unallowable Costs
It’s vital that government contractors—and especially those handling the accounting for these contractors—understand the unallowable accounting requirements of FAR 31.201-6. This means keeping separate unallowable cost accounts in your accounting system, typically by separate unallowable cost pools.
Recording and Accumulating Costs Monthly
While this is a common practice for most businesses anyways, it is still worth noting for government contractors, because failure to accumulate your costs in the books of account at least once a month can disqualify you from contract work for the government. You must be able to present projects at least monthly, showing total costs incurred, including indirect costs. Please also note that QuickBooks standard reports typically don’t meet this requirement without you making significant modifications to the software.
Tracking Costs by Contract Line Item
Contract line items, also referred to as CLINs, as tasks or individual segments within a contract; they can also be deliverables. As a government contractor, you must track costs by contract line item, treating those line items as projects. This also means charging direct costs to line items, as well as allocating indirect costs to those contract line items.
Providing Historical Accounting Data
In order to provide detailed and accurate historical accounting data, you will need to follow all of the above-mentioned standards, as well as the rest of the DCAA’s compliance standards that are not outlined in this article. Assuming all of the DCAA standards are met, you should be able to meet the reliability of historical cost data requirement for follow-on procurements.
Again, DCAA-compliant accounting is extremely complex, and requires contractors to keep records that are even more detailed than your average business’s accounting methods. As we mentioned above, not all of the DCAA’s requirements are mentioned here, as there are simply too many for us to cover.
But if you’re worried about meeting DCAA compliance standards for your accounting methods, we invite you to reach out to us here at Peter Witts CPA. We specialize in working with government contractors, and helping business owners like you to meet these stringent compliance standards. Give us a call today to schedule a consultation with one of our experienced and knowledgeable CPAs. We’ll help get your accounting methods in order, so you can apply to government contracts with confidence.