One of the biggest allocations of the budget for federal contractors is through the Department of Defense or DoD. This is why the DCAA or the Defense Contract Audit Agency, exists. If you are a contractor and sent out a proposal to work for the DoD, you will have an audit done by the DCAA, called the “Pre-award Survey”.
In a Pre-award survey, an auditor will be checking on the attributes of your accounting system and if it meets the needs and requirements of the DoD, and will not test your accounting system’s efficacy.
It’s like you have lots of allergies and your nutritionist checks all the ingredients the cooks will use before they prepare your dinner, but the nutritionist will not taste the meal, only check on the elements.
As the contractor, you will need to provide a lot of documentation for the accounting system and for procedures and policies as well. Another thing, you will need to demonstrate to the auditor that your accounting system can handle accumulating costs.
The Pre-award Survey will be done in stages:
Initial Stage
The auditor will check if your system:
- Is compliant with the Generally Accepted Accounting Principles or GAAP.
- Can separate direct cost from indirect cost consistently and accurately
- Can create a subsidiary job cost ledger to pinpoint the direct costs based on the contract
- Has indirect costs connected to their cost objectives
- Can merge the job cost ledger and the general ledger as well as other books
The end target here is that the system can place all costs accumulated under the control of the general ledger.
Mid Stage
The auditor will now begin checking on:
- Employee timekeeping. Usually, a daily timesheet, approved by their supervisor is required.
- Charges of direct and indirect labor to the right cost objective. Employee time needs to be differentiated based on cost objectives.
- The system’s ability to generate reports. Does the system charge costs to the contracts at least once in a month?
- Unallowable costs are not part of costs charged to the contractor
If necessary, the DCAA will check if the accounting system is able to pinpoint costs by contract. Not all federal contracts require this.
Last Stage
In this final stages, the auditor will:
- Ensure that the system can separate production costs from preproduction costs, if you are a manufacturing company
- Check if the system can limit billings and costs.
- Determine if the system can account for specific objectives and bill appropriately.
- Make sure that your system can keep and maintain records, and provide data in the future if the need arises.
- Find out if your system is operable and working. Although it is not a requirement, the auditor will note missing functions, working functions, and those that do not work or missing.
The Pre-award survey can feel invasive, difficult, and just too much to prepare for. This is where Peter Witts CPA PC comes in. We make the accounting part easy for you and assess what you need and integrate ours. Our 20+ years of experience with Government Contract Accounting, as well as having a former DCAA auditor in our bag will certainly come in handy for you.