DCAA Compliance for New Defense Contractors in Dracut: How to Start on the Right Foot

Dracut is quickly becoming a hub for small businesses and startups entering the world of government defense contracts. With billions in defense spending flowing through Massachusetts, now is the time for new contractors to position themselves for success. But before you can secure that first big contract, there’s one major hurdle you can’t ignore: DCAA compliance.

Think of DCAA compliance as the foundation your entire business will stand on. Without it, you risk losing contracts, facing costly audits, or worse — damaging your reputation. The good news? Getting it right from the start is absolutely doable, especially with the right support.

Let’s walk through exactly what you need to know.

What Is DCAA Compliance — And Why It Matters for New Contractors

The Defense Contract Audit Agency (DCAA) doesn’t hand out certifications or shiny plaques. Instead, it ensures that government contractors manage taxpayer dollars responsibly by maintaining proper accounting systems, internal controls, and documentation.

For new defense contractors in Dracut, strong DCAA compliance isn’t just about passing an audit — it’s about running a financially sound, tax-efficient business. Proper setup can also streamline your tax preparation, improve your cash flow, and even make your company more attractive to prime contractors and federal agencies.

Bottom line: You can’t afford to treat DCAA compliance as an afterthought.

Key Areas Where DCAA Will Focus (And Where You Should Too)

When the DCAA shows up (and they will), here’s where they’ll look closely:

1. Timekeeping Systems

Employees must record time daily, accurately, and against the correct job codes. Manual timesheets or “guessing hours at the end of the week” can cost you dearly.

2. Accounting Systems

You need an accounting system that can segregate direct and indirect costs, track contract expenses in real time, and support detailed reporting. (Hint: QuickBooks paired with GovCon add-ons can work well for smaller firms.)

3. Cost Allocations and Indirect Rates

It’s critical to establish and document how overhead, fringe benefits, and general admin costs are allocated. Misallocated costs can disqualify you from contract awards — and trigger IRS scrutiny.

4. Labor Distribution

You must properly assign labor costs to the correct contracts and activities. Timekeeping feeds directly into this, so consistency is key.

5. Internal Controls and Written Policies

No undocumented policies. DCAA expects to see detailed procedures for billing, timekeeping, approvals, and expense allocations.

Setting Up the Right Systems Early: Your Compliance Checklist

Building a compliant operation starts with smart choices early:

• Use DCAA-compliant accounting software: Think Deltek, Unanet, or a properly configured QuickBooks setup.

• Train all employees: Everyone must understand the importance of time entry — and that falsifying timesheets is a big deal.

• Document everything: Create clear written policies covering timekeeping, expenses, billing, and cost allocation.

• Establish internal controls: Regular reviews, approvals, and segregation of duties are must-haves.

Setting up these systems at the start helps with DCAA audits, streamlines tax filings, and supports faster growth.

Common Pitfalls New Contractors in Dracut Should Avoid

We’ve seen these mistakes cause real pain:

• Poor recordkeeping: One local startup nearly lost a $250K Navy subcontract because they couldn’t provide adequate timesheet backups.

• Mixing direct and indirect costs: A common issue that leads to messy, disallowed costs — and lost reimbursements.

• Casual timekeeping practices: “I’ll fill it out Friday” doesn’t cut it. Time entries must be made daily.

• Waiting until an audit notice arrives: DCAA doesn’t give you months to fix problems — prep now, not later.

How to Start Strong: Practical Steps for Day One

Here’s how you can ensure you’re audit-ready from the beginning:

1. Work with a CPA who knows DCAA: Peter Witts CPA specializes in helping defense contractors set up compliant accounting systems that are ready for audits and optimize tax outcomes.
2. Schedule a pre-award accounting system review: Identify gaps before DCAA auditors do.
3. Develop written policies: Timekeeping, billing, expenses — they all need clear, accessible documentation.
4. Invest in Virtual CFO services: Get ongoing strategic oversight on compliance, cash flow management, indirect rate calculations, and tax strategies.

Virtual CFO services are especially valuable for small businesses that can’t justify a full-time controller but still need senior financial leadership.

Why Partnering with a CPA for DCAA Compliance Matters

A DCAA-savvy CPA does more than “keep the books.” Here’s what you gain:

• Set up accounting systems that meet both DCAA and IRS requirements

• Calculate and optimize indirect cost rates for greater profitability

• Prepare financial statements that comply with FAR (Federal Acquisition Regulations)

• Implement financial controls to safeguard cash flow and avoid compliance violations

• Stay on top of changing rules and best practices without guessing

At Peter Witts CPA, we also specialize in tax preparation for defense contractors and offer Virtual CFO services tailored for growing businesses in the government sector.

Ready to Set Up for Success?

DCAA compliance isn’t a scary mountain you have to climb alone. With the right systems, strategies, and support, you can build a strong foundation that keeps your business thriving for years to come.

If you’re a new defense contractor in Dracut — or planning to become one — let’s make sure you’re starting on the right foot.

Schedule a free consultation with Peter Witts CPA to discuss how we can help you stay compliant, maximize tax benefits, and position your business for success.