If you’re a small business stepping into the world of government contracting, DCAA compliance probably feels like an intimidating hurdle. The acronyms, the audit rules, the expectations—it’s a lot.
And while most large firms have internal compliance teams and CFOs to handle it all, small businesses often don’t. You’re likely managing client work, payroll, and operations—and now you’re expected to build a compliant accounting system too?
We get it. At Peter Witts CPA, we work with small government contractors every day to help them stay DCAA-compliant, win more contracts, and avoid costly audit mistakes. In this article, we’ll break down the most common DCAA compliance challenges—and how to solve them with the right systems, tools, and support.
What Is DCAA Compliance (and Why Does It Matter for Small Businesses)?
The Defense Contract Audit Agency (DCAA) is the federal agency responsible for auditing businesses that work with the Department of Defense and other government entities. Their goal is to ensure contractors are charging the government fairly, using proper accounting practices, and maintaining adequate documentation.
For small businesses, that often means:
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Implementing compliant timekeeping and accounting systems
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Accurately classifying direct and indirect costs
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Creating internal controls and policies
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Being prepared for audit inquiries or floor checks
Let’s say you win a small DoD contract. You begin invoicing for labor and materials. If your records aren’t detailed and compliant, the DCAA may reject your costs—or even freeze future payments. That’s why it’s critical to prepare early, before the audit ever comes knocking.
Common DCAA Compliance Challenges for Small Government Contractors
DCAA Timekeeping Issues
Timekeeping is one of the most common problem areas. DCAA requires that employees record their time daily, without retroactive changes or shared logins. But many small businesses still use spreadsheets or outdated software—systems that aren’t designed for compliance.
Even worse, employees may not be trained on what counts as direct labor, indirect work, or unallowable time—leaving room for misreporting.
Cost Allocation Confusion
Cost pools like overhead, fringe, and G&A are essential for DCAA compliance. But many small business owners don’t have a framework for segregating costs. The result? Direct and indirect expenses get lumped together, which skews pricing, affects billing accuracy, and risks audit findings.
Non-Compliant Accounting Systems
Most off-the-shelf accounting software (think QuickBooks out of the box) isn’t DCAA-ready. It might lack audit trails, real-time cost tracking, or the ability to calculate provisional indirect rates. Without customization or supplemental systems, small businesses can fall short of DCAA expectations.
Missing Policies and Internal Controls
You might have processes in place—but if they’re not documented, they won’t hold up under audit. DCAA auditors want to see formal written procedures for things like labor charging, billing, cost classification, and timekeeping corrections.
Without this documentation, even compliant behavior may be flagged.
Lack of In-House Compliance Expertise
Small teams wear many hats. The person managing your books might also handle HR, payroll, and office management. That leaves little time for compliance strategy—let alone keeping up with FAR and DCAA updates. It’s not that you’re ignoring the rules. You just don’t have the capacity to master them.
Poor Audit Preparation
Many small contractors don’t think about audit prep until they receive the notice. But by then, it’s often too late. If records are scattered, policies aren’t updated, or time entries are incomplete, your risk of disallowed costs skyrockets.
How to Overcome DCAA Compliance Challenges
You don’t need to hire a full-time CFO or build a compliance department to meet DCAA standards. Here’s how to take action, one step at a time:
Use a DCAA-Compliant Timekeeping System
Swap out spreadsheets for approved timekeeping software. These systems support daily time entries, corrections with audit trails, and real-time approvals. We help clients choose and implement software that fits their budget and meets DCAA expectations.
Define and Document Cost Pools
Work with a CPA to structure your cost pools—direct labor, indirect costs, fringe, G&A, and overhead. This ensures accurate reporting and prevents misclassification that could lead to audit trouble or underbidding future contracts.
Upgrade or Customize Your Accounting System
Whether you’re using QuickBooks, Deltek, or another platform, your accounting system must:
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Track direct and indirect costs separately
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Maintain audit-ready records
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Support indirect rate calculations and billing requirements
We help small businesses configure their systems to align with DCAA requirements without overcomplicating daily operations.
Create a Basic Accounting Policy Manual
You don’t need a 100-page manual, but you do need written procedures. A clear set of policies around timekeeping, billing, labor charging, and document retention shows auditors that your team is consistent, informed, and in control.
Get Strategic Support from a CPA or Virtual CFO
If you don’t have internal compliance expertise, you don’t need to go it alone. A CPA with DCAA experience can handle system setup, policy documentation, and ongoing guidance. Need something more comprehensive? Our Virtual CFO services offer full financial strategy, compliance monitoring, forecasting, and reporting support.
Conduct Pre-Audit Reviews
Don’t wait until the audit is scheduled. A mock audit or DCAA readiness check helps uncover gaps before they become liabilities. We perform pre-audit reviews that simulate what the DCAA will ask for—giving you the time to fix issues in advance.
How Peter Witts CPA Helps Small Contractors Stay Compliant
We know DCAA compliance isn’t your only priority—it’s one of many. That’s why our team works as a true partner to help you stay compliant, organized, and audit-ready without losing focus on your core work.
Our services include:
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DCAA-compliant accounting system setup
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Timekeeping and billing policy development
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Virtual CFO services for government contractors
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Ongoing compliance oversight and audit support
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Tax preparation and planning with federal contract insight
Whether you’re pursuing your first contract or managing a growing book of business, we’re here to help you operate with confidence.
Don’t Let DCAA Compliance Hold You Back
For small government contractors, DCAA compliance can feel like a heavy lift—but it doesn’t have to derail your operations. With the right systems and support in place, you can stay ahead of the audit curve, win more contracts, and keep your revenue flowing.
If you’re not sure where you stand or want a second opinion, we offer free DCAA compliance consultations to help you assess your risk and build a plan.
Contact Peter Witts CPA today to schedule your consultation and start building a more secure, compliant foundation for your business.