7 min read DCAA Compliance: 8 things you should know
The Defense Contract Audit Agency is a government entity that works on behalf of the Department of Defense. The DCAA uses a complex set of regulations, among other things, to examine the financial health and overall competence of construction firms that submit bids for government jobs on DoD construction contracts. To learn more about the history and mission of DCAA, see the agency's official "about us" page at their main website.
Besides doing a deep-dive into the entire financial and accounting realm of contractors who win bids and begin working for DoD, the DCAA performs pre-bid audits to make sure that bidders have the financial stability and construction capability to actually complete the job on which they are bidding.
All in all, the process for winning a government contract is highly complicated. Not only does the bidding contractor need to be ready for close examination by the DCAA, there’s also the prospect of having to undergo an unannounced DCAA audit at any time during the course of the project.
Construction companies who are thinking about bidding on one of the many financially lucrative government jobs need to be fully informed about what DCAA is, what it does, how it uses an intricate set of rules known as Federal Acquisition Regulation guidelines to audit contractors.
What is the DCAA, and What Does it Mean to be “DCAA Compliant”?
DCAA compliance is the bread and butter of any contractor who works on a DoD job. In fact, DCAA does not do any formal type of certification on contractors. Instead, the term “DCAA compliance” refers to the efforts and systems used by contractors to meet the stringent demands of a DCAA audit. There are two primary sets of guidelines to follow for maintaining DCAA compliance: FAR and CAS, which will be discussed below.
What Special Rules Apply to Government Contractors?
Any company that wins a government contract must become acquainted with Federal Acquisition Regulation (FAR) standards as well as Cost Accounting Standards (CAS).
Federal Acquisition Regulation and Cost Accounting Standards (FAR and CAS) are the important sets of rules that every government contractor must abide by. Auditors use these two “books” as their general roadmaps when performing detailed examinations of contractors. They also use portions of FAR and CAS during pre-screening procedures on bidders.
Each one of these rule sets delineates very specific guidelines about government procurement methods. They list the things the government can legally “buy” from outside entities, how much can be paid for goods and services, how contractors can charge the government for work done, how contractors must set up accounting systems before and during construction jobs, and much more.
All about DCAA Audits
There are dozens of kinds of DCAA audits but some of the most common for contractors include CPSR (contractor purchase systems review), benefits & compensation, incurred cost, pre-award, floor checks, forward pricing, special event, and labor charging.
Sometimes, DCAA audit teams will hire a third-party accounting firm to do a specialized type of audit, and the procedure can take days or even weeks depending on the size of the job. It’s important for contractors to understand that some DCAA audits are completely unannounced while others begin with a letter to the contractor.
What DCAA Typically Looks for in Audits
The main goal of government audit procedures is to make certain that costs are kept to a minimum. Even experienced accountants who have conducted hundreds of private industry audits are often bewildered by the unusual methods employed by DCAA auditors. The standards for government accounting are quite different from the ones used by commercial firms who hire contractors to do construction jobs.
In a routine DCAA audit, the examiners are looking for details related to direct costs, any cost pools, various unallowable costs, indirect costs that have been pooled, and allowable costs. There’s much more to it than just those few items, but those are usually at the top of the DCAA auditor’s checklist.
Where to Find Out More about Audits
While the stress level can be rather high when DCAA auditors arrive unannounced, contractors need not worry. The DCAA Contractor’s Audit Manual is available to every bidder on a government construction project and includes every detailed item that auditors are apt to examine.
The document is quite comprehensive but its key components explain how to use the proper accounting systems on government jobs, what labor rules are most important, how to make proper price proposals, how to create a price proposal and more. The best single resource for contractors who are considering a government bid is on the DCAA website.
How Small Companies Can Prepare for a DCAA Audit
There’s a very helpful PDF document on the official DCAA website for smaller contractors that want to learn more about DCAA audit methods and relevant checklists. The document explains in detail all the pertinent accounting system requirements, both in the pre-award and after-contract phases. It’s always to your advantage to find out as much as possible about what a DCAA audit entails.
The DCAA website is the ideal place to begin, especially for small contractors who want to know about issues that typically come up for companies that are not billion-dollar entities. DCAA executives know that small contractors who have never bid on a government job need extra help, and the DCAA website has it. There’s even a special phone number for small contractors to call if they have questions about preparing a bid. It’s 571-448-2008.
One of the key aspects for bidders on any DCAA-related job has to do with timekeeping. Perhaps more than any other specific category, government auditors concern themselves with making certain that every hour worked is recorded properly and within a system that allows for verifiable audit trails.
What about Electronic Timekeeping?
Worker time logs, and other timekeeping records, are a crucial part of the compliance process on any government contract. Companies that use a thorough, effective timekeeping system, like the ones available from ClockInEasy, are able to track and verify every relevant variable that pertains to employee timekeeping.
For example, if a DCAA auditor wants to look at details for overtime hours, payroll data, fraud-preventive biometrics, labor compliance reports, or anything else related to timekeeping, the ClockInEasy app can help a contractor fully meet DCAA demands and assure full compliance when properly used.
When a contractor opts to use electronic timekeeping, the system used must be completely DCAA compliant. Additionally, the company must meet other requirements with regard to timekeeping on any government job, including the following items:
1. The workers must have control over their own time sheets so no changes or alterations can be made by unapproved personnel.
2. Whenever an employee enters a change on a time sheet, there needs to be an automated way to enter a written reason for the change, the date of the change and an electronic signature.
3. A DCAA-approved timekeeping system must allow for documents besides just the time sheet to be scanned and stored under a particular worker’s name.
4. To provide a seamless audit trail, timekeeping systems within the DCAA rules will include project numbers, stamped entry, specific dates and times, every change made, and identity data for who made or attempted to make the change. Even corrections by management need to be listed in detail along with reasons for the corrections and who made them.
5. Time logs for workers must only list hours worked. There should never be an entry for hours an employee intends to work.
6. All electronic time sheets must be password secure and must prompt workers to change their passwords at least twice each calendar year.
Important DCAA Audit Trends to Watch For
DCAA audits are not static procedures. Every few years, the federal government changes the way their audit teams conduct DCAA examinations, both at the pre-award phase and during construction work.
Contractors must stay up to date with DCAA audit trends in order to remain compliant with all applicable rules on any given job. There are a three recent changes in DCAA audit procedures that apply to anyone working on a government job.
1. Timekeeping Audits by DCAA Personnel
Contractors should be ready for a full-fledged audit at any time. For companies that are strict about maintaining compliance, an audit should not be a stressful event. But the word “audit” always seems to strike fear into the hearts of even the most seasoned construction supervisors. One of the most recent trends for auditors is to conduct timekeeping-specific examinations.
When an auditor arrives on the job site, the contractor should be ready to provide detailed data on approval/submission procedures, time entries for all workers, paid and unpaid time verification documents, specific audit trails, the exact number of hours spent on each separate project, and more.
2. Business Systems Used by Contractors
More and more, DCAA is using the audit procedure to look more deeply into contractors’ business systems. The goals of such audits include measuring the overall effectiveness of the contractor in relation to the job at hand. The government’s concern is to verify, even after awarding a contract, that the company doing the work is completing the work efficiently and effectively while maintaining strict cost controls.
3. Risk Thresholds
Though not cast in stone, DCAA is typically only initiating audits on contractors whose annual costs on a specific job are greater than $1 million. However, contractors who had trouble with DCAA audits of accounting systems might be audited even when their annual job-related costs are well below the million-dollar threshold.
