Numerous companies, businesses and individuals work in contracting relationships with the federal government. An important part of government contracting is ensuring compliance with government regulations and standards. In particular, contractors with the Department of Defense (DoD) must be DCAA compliant in accordance with specific regulations and standards. This article highlights the key aspects of DCAA compliance, and outlines how to prepare for smooth business interactions with the DoD.
1) DCAA: Organization and Purpose
The Defense Contract Audit Agency (DCAA), a federal agency operating under the DoD, was founded in 1965. Its mission is to provide audit and financial advice services regarding contract acquisition and administration for the DoD and other federal agencies. The DCAA operates under the direct authority and control of the Under Secretary of Defense (Comptroller)/Chief Financial Officer. It functions as a “steward of taxpayer dollars.” The high-quality audits they provide are meant to ensure that military personnel receive the goods and services they need at fair prices.
Every year, DCAA audits numerous DoD contracts of all sizes. In 2019, DCAA examined nearly $365 billion in defense contractor costs and saved taxpayers $3.7 billion.
2) DCAA Compliance
DCAA conducts its audits and other activities to assess contractor compliance with government guidance and regulations. DCAA does not actually certify that its contractors are compliant. In actuality, being “DCAA compliant” means that contractors are adhering to DCAA’s advice and recommendations. Doing so ensures that the contractor will operate under the law and will be prepared for financial audits.
Among the topics included in DCAA recommendations and advice are having (1) documented policies in place that the contractor rigorously follows, (2) business systems that are compliant with DCAA requirement, (3) accounting systems that track various cost categories separately, (4) timekeeping records that are fully integrated with cost accounting, and (5) audit-ready records available should an audit be initiated.
3) The DCAA Audit Process
The principal accounting concern in government contracts is cost. Consequently, costs are the principal focus of DCAA audits. Costs in government contract work are classified, segregated, allocated and reported differently in comparison to those of commercial businesses. Typical DCAA audits look closely at all costs including unallowable costs, direct costs, indirect costs, and the pooling of indirect costs. These audits are governed by the rules outlined in three main documents: FAR, CAS and GAGAS.
4) DCAA Audit Types
DCAA, and sometimes DCMA, conducts a variety of different audit types. These audits include, but are not limited to forward pricing, incurred costs, compensation and benefits, pre-contract award, labor charges, and contractor purchase systems review (CPSR). In addition, the contractor may request and receive an opinion on specific aspects of any contract. Such audits are termed “ special” or “other” audits.
5) The Pre-Award Survey
DCAA will perform a pre-award survey for entities in competition for a government contract. The purpose of this survey is to assess whether the contractor is capable of accounting for all of the costs associated with the labor and materials that the contract entails. The pre-award survey is important in that it carries a “Pass/No Pass” status.
Two main questions are asked in the pre-award survey. First, is the contractor financially able to complete the work required in the contract? In order to assess this DCAA will examine cash-flow records, SEC filings, tax returns, loans and other financial information. A recommendation is then made whether the contractor appears financially fit to fulfill the contract.
Second, does the contractor’s accounting system comply with what is acceptable under government contract standards? In particular, DCAA will assess whether the accounting system can track costs properly. It pays to be prepared by using a system that has previously passed government scrutiny.
6) FAR/DFARS, CAS and GAGAS: Rules for Contractors
Contractor business activity for the federal government is governed by a combination of written rules: FAR/DFARS, CAS and GAGAS. FAR is the acronym for Federal Acquisition Regulation. The extensive set of rules and regulations in FAR ensures that the government procurement process is handled in a systematic, fair and uniform manner for all. DFARS is the Defense Federal Acquisition Regulation Supplement. CAS is short for Cost Accounting Standards. The 19 standards outlined in CAS are designed to maintain consistency in accounting for procurement costs within and between government contractors. Finally, there is GAGAS, shorthand for Generally Accepted Government Auditing Standards. GAGAS is the essential rulebook that DCAA follows when it conducts audits.
7) Preparing for a DCAA Audit
Contractor audits are fairly common because of the dual DCAA mandate to spend taxpayer dollars wisely while simultaneously providing the goods and services needed by DoD. Consequently, all government contractors should conduct their business with full knowledge of the DCAA audit process. Fortunately, DCAA provides an overview of the audit process in the DCAA Contractor’s Audit Manual.
8) Noteworthy Trends in the Government-Contractor Relationship
A number of trends have recently emerged in DCAA audits that may be useful for those engaged in or preparing for federal contract work. One area that DCAA is increasingly scrutinizing is the effectiveness of contractor business systems. Also, because of the large number of Incurred Cost audits, DCAA has begun using a tiered approach in their audit assessments.
9) Resources for Government Contractors
Fortunately, there are a number of helpful publications available for those who contract with the government. The DCAA Information for Contractors guide is designed to assist contractors in the understanding of DCAA and other requirements and to help in the preparation for audits. In addition, the DCAA website offers an extensive list of helpful links regarding their audit process.
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