If you’re not familiar with the ins and outs of DCAA audits and compliance, it can come out of nowhere and become a nightmare to prepare for and go through. Not only that, but failing to properly prepare can result in you being disqualified from not only the current contract on the table, but future chances as well. Keep reading to learn what DCAA is, what they do, and more.
What is the DCAA?
The DCAA, or the Defense Contract Audit Agency, is a federal branch run by the Department of Defence. Created in 1965, its purpose (as the name suggests) is to provide auditing and financial services that inform the government during the contract acquisition process. While the agency is run by the DoD, the DCAA also occasionally lend their services to a select few other federal agencies.
What do they do?
As we just mentioned, the DCAA primarily conducts audits of potential contractors and gives recommendations to ensure that the government’s funds are spent effectively. These audits look at whether a contract’s costs are allowable, allocable, and reasonable. Essentially, the DCAA helps ensure that the DoD gets the most bang for their buck when scouting contracts. However, it’s important to emphasize the fact that this is not a small factor. The DCAA’s audits and recommendations often play a large role in contract negotiations and what your company will end up being paid for your services.
Because these audits are so influential in the outcome of your contracts, it’s important to be DCAA compliant. This applies even if you don’t primarily work with the DoD, as the DCAA services can be used by other agencies sometimes.
However, being “DCAA compliant” doesn’t mean that you passed their audit. It actually means that you follow their guidance to be compliant with federal law and are prepared for audits. One of the biggest points of this compliance revolves around your accounting system following their guidelines for being capable of things like tracking costs separately by category (direct, indirect, accounting, billing, and labor costs). The DCAA also recommends having your accounting system integrated with an accurate timekeeping system, as these reports will be analyzed during an audit.
DCAA & FAR/CAS
The requirements and guidance for these audits have to come from somewhere, and the DCAA gets them from the rules outlined by the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS), and timekeeping and labor charging system requirements.
- FAR – federal agencies get their high-level guidance on audits from the Federal Acquisition Regulation, which includes a set of standardized policies and procedures within the federal acquisition process.
- CAS – the majority of DoD contractors have to comply with the Cost Accounting Standards, which are another standardized set of practices, but are used specifically for pricing and accounting.
- System Requirements – another way that reports and information need to be made consistent across companies is through their timekeeping procedures with an automated system that tracks labor.
Types of DCAA audits
Now that we understand the reason that DCAA audits happen and some of the aspects of compliance, it’s important to understand the different types of audits that can be performed. The four primary types of DCAA audits are forward pricing, incurred cost, special audits, and pre-award surveys:
- Forward pricing – conducted before the contract award, these evaluate a contractor’s estimate of how much it will cost the contractor to provide the products or services to the government.
- Incurred cost – conducted after the contract award, these determine the accuracy of a contractor’s cost representations (when the contract price is not fixed).
- Special audits – these can be conducted either before or after the contract award and are usually specifically requested by contracting officers to get an independent financial opinion on areas of the contract or a contractor’s accounting details.
- Pre-award surveys – common with small business contractors, DCAA Standard Form (SF) 1408 examines the contractor’s accounting system, determining whether it is adequate for awarding a contract, and requires completion of the SF 1408 form (Pre-Award Survey of Prospective Contractor Accounting System).
- The audit looks at accounting systems to make sure that they are GAAP (Generally Accepted Accounting Principles) compliant and have accurate timekeeping systems, labor distribution, cost allocation, and billings.
- Other audits – usually conducted after the contract award, these can be requested by contracting officers and are primarily used when there is a high-risk contractor (such as if their business systems are inadequate).
Difficulties with compliance
It can be complicated and difficult to ensure that your business is compliant at all times. Timekeeping, in particular, is a common point of issue in the audits — but it can be difficult to ensure that all employee hours are accurately recorded, associated with cost objectives, approved, organized, and more. There can also be complications in accounting systems such as revenue recognition with different types of contracts and unallowable costs. These additional layers of tracking and information organization can be especially difficult for smaller businesses that don’t have the resources to create an entire team tasked with managing this.
Consequences of noncompliance
However, if your company is not compliant with government regulations that apply to your industry, there can be a variety of consequences and penalties handed down. In severe cases, civil or criminal penalties, or even debarment, may be imposed. Other less severe consequences can include fines, your contracts being terminated or voided, a negative company reputation, and more depending on the situation.
Ensure that you’re DCAA compliant today
The team at FAMR has years of experience preparing for and navigating the federal contracting industry. We can provide consultation and guidance to make sure that your company is set up to make the most of any contracting opportunities that are a fit. If you’re ready to optimize your chances of winning contracts through the federal marketplace, get in touch with us today!