The words “DCAA audit” can strike fear into a federal contractor’s heart. But you can also view your preparation for this accounting system review as a competitive advantage. When you meet DCAA’s demanding accounting criteria—whether or not you’re currently a defense contractor—you signal your firm’s readiness and competence in the Govcon marketplace.
With the help of a knowledgeable advisor, you can turn a DCAA review into a chance to up your game as a government contractor.
Alphabet Soup Demystified
The Defense Contract Audit Agency (DCAA) is responsible for reviewing Government contractors’ accounting systems, policies, and procedures to ensure the Government pays a reasonable price when procuring goods and services. The primary aim of these reviews is to ensure that contractors properly track costs throughout the acquisition process.
Two major sets of rules guide a DCAA review. The Federal Acquisition Regulation (FAR) applies to the purchase of goods and services. The Cost Accounting Standards (CAS) require uniformity and consistency in determining costs during procurement.
The DCAA Review Process
- A DCAA review is initiated only at the request of a federal agency. A contractor cannot request an audit.
- Despite federal contracting jargon, there is no such thing as an officially “DCAA-compliant” accounting system. The agency reviews a contractor’s system, policies, and procedures during the acquisition process and makes one of two findings—”adequate” or “not adequate.”
- According to Federal Acquisition Regulation (FAR) 16.301-3, an adequate finding is required to be awarded cost-reimbursable contracts. FAR 104 considers the adequacy of a contractor’s accounting system as a factor before agreeing on a contract type other than firm-fixed-price.
A review addresses the adequacy of systems, policies and procedures with respect to compliance with FAR and DCAA requirements. A key is that a contractor will need to have written policies as a key part of their overall accounting system. The DCAA audit procedure is based on the Standard Form (SF) 1408 Pre-Award Survey of Prospective Contractor Accounting System Checklist. This checklist includes:
- Proper segregation of direct costs from indirect costs.
- Identification and accumulation of direct costs by contract.
- A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives (a contract is a final cost objective).
- Accumulation of costs under general ledger control.
- A timekeeping system that identifies employees’ labor by intermediate or final cost objectives.
- A labor distribution system that charges direct and indirect labor to the appropriate cost objectives.
- Interim determination of costs charged to a contract through routine posting to books of account.
- Exclusion from costs charged to government contracts of amounts that are not allowable pursuant to FAR part 31 or other contract provisions.
- Identification of costs by contract line item and by units (as if each line item or unit was a separate contract) if required by the proposed contract.
- Segregation of preproduction costs from production costs.
Avoiding the Catch-22
If your firm is new to Government contracting, the DCAA review process may appear to be a Catch-22. You need an accounting system review to bid on certain contracts, but you can’t get that review unless it’s directed by a federal agency. The good news is that many solicitations provide for an accounting system review before contract award as part of a pre-award process. But what if your firm doesn’t have that option? Or, what if you aren’t certain you will pass a pre-award system review?
Companies increasingly steer around the uncertainty by hiring a consultant to proactively review their accounting systems in order to be audit ready. When permitted by the Government, a company can engage a firm to provide an independent accounting system adequacy review in preparation for a contract bid. The consultant most often employs an audit routine based on SF1408 criteria.
If the contract you’re bidding on contains a Defense Federal Acquisition Regulation Supplement (DFARS) accounting system clause (252.242.7006), you can engage a consultant to review your system based on these criteria.
CAVU can help you understand DCAA criteria, assess your accounting system, get audit-ready, and submit your next bid with competitive confidence. CAVU can also conduct an independent review of your accounting system.