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Compliance for Federal Contractors Accounting Systems

by Andrea Winey

Thank you to Tom Moler, of YHB (Yount, Hyde & Barbour, PC) for this article!
To learn more about the GovCon initiative, click here.

Is it important to have our accounting system in compliance with the Defense Contract Audit Agency’s (DCAA) requirements?  That’s one of the first questions we get from many of our small government contractors.  Many have graduated from the early days of subcontracting on one task order for a large prime contractor to either becoming the prime contractor or expanding services across multiple contract deliverables.  Either way, the answer is usually “Yes!” followed by, “If you want to play in the government sandbox, you’ve got to know and play by their rules.”

In the past, only large contractors and those with cost reimbursement contracts worried about compliance to the point of being able to pass a DCAA audit.    However, today, small contractors can find themselves in a difficult position very quickly if they are not in compliance.   If small contractors systems are not up to par, credibility in the eyes of their contract partners can suffer, which will ultimately affect their ability to win opportunities.

DCAA Requirements for Accounting Software

While it may be hard to believe, the DCAA does not have an ‘approved accounting software’ or an ‘approved accounting system’, they only evaluate them for adequacy.  Your accounting system must be able to:

  1. Operate with solid internal controls
  2. Segregate direct costs from indirect costs
  3. Identify and accumulate direct costs by contract
  4. Reconcile subsidiary ledgers and cost objectives to the general ledger
  5. Approve and document adjusting journal entries
  6. Identify allowable and unallowable costs under the contract
  7. Identify labor costs by contract or cost objectives
  8. Reconcile billings to the cost objectives

Smaller contractors frequently work with a version of QuickBooks or Sage (formerly Peachtree), both of which have add-ons for time entry, billing and expense tracking in the government space.  Many medium to large contractors utilize software with a general ledger package that is fully integrated with the time, billing and expense features.  PROCAS, Deltek, and JAMIS are a few examples in this category.  However, the accounting software itself is not as important as the underlying accounting procedures and controls within which you operate the system. 

Accounting for Revenue and Expenses

The DCAA requirements focus on your controls, the items in place to ensure that you are accounting for revenue and expenses properly.  They not only look at overall accounting system controls, such as the segregation of duties, but also at how you identify and capture direct and indirect costs.  Controls around your timekeeping system are critical, as well as those protecting your IT infrastructure.  Companies that are new to the government space should go to the DCAA website and review their “Pre-award Survey of Prospective Contractor Accounting System” checklist.  The questions found in this survey cover:

  1. Your DCAA audit history or experience
  2. Compliance with applicable GAAP standards
  3. Compliance with Federal Acquisition Register (FAR) 31 Cost and Estimating Principles
  4. Segregating direct and indirect costs by contract, or cost objective
  5. Proper distribution of labor costs by contract, or cost objective
  6. Supporting requests for progress payments

Record Retention

The DCAA also requires your accounting system be functioning well after the contract period in the form of record retention.  The general requirement is three years after the final payment is received on the contract, however, the applicable FAR also provides for specific retention periods of 4 years for financial and cost accounting records, pay administration records and acquisition records.

Use the Numbers

YHB has assisted numerous companies over the years in a variety of industries, and one common thread amongst the successful ones is that they paid attention to the numbers.   What do we mean by that?  Our clients not only had an accounting system, they actually utilized the imbedded information to help drive the decision making process and to increase profitability.

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For more information about the GovCon Initiative, click here

For more information on the above or related topics, contact YHB (Yount, Hyde & Barbour, PC) Principal Tom Moler at tom.moler@yhbcpa.com  or 703-777-7739.