FAQs About DCAA Compliant Bookkeeping


  1. Who is the DCAA?
  2. What is DCAA compliance?
  3. Why is DCAA compliance so important for government contractors?
  4. Is DCAA getting tougher on government contractors?
  5. Who is my Contracting Officer?
  6. Are QuickBooks and Peachtree approved by DCAA?
  7. What is the best way to modify my QuickBooks and Peachtree to meet DCAA standards? Is there additional software I need to purchase?
  8. What if I need "catch-up" accounting?
  9. Wouldn't I be better off hiring an in-house bookkeeper?
  10. How much does it cost?
  11. What about security?
  12. How do I separate my commercial and government direct costs in my accounting system?
  13. What is the difference between a provisional and actual indirect rate?
  14. What is the difference between a fixed-price (FFP) and a cost-plus-fixed-fee (CPFF) contract?
  15. What is an adequate accounting system?
  16. What is the difference between my payroll service and labor distribution?
  17. How do I know if I have to prepare an Incurred Cost Submission (ICS) for DCAA?
  18. What is the deadline for submitting an Incurred Cost Proposal?
  19. What is the difference between overhead and General and Administrative (G&A) costs?
  20. What are the differences between DoD and NASA costs?

Who is the DCAA?

DCAA stands for Defense Contract Audit Agency. DCAA reviews the accounting practices and accounting of government contractors, including prime contractors and subcontractors.

Even if the only federal contracts that your company has are Fixed Price contracts, you must have a DCAA-compliant accounting system that would support Cost Type contracts. Cost Type contracts include both Cost Plus and Time and Materials Contracts.

Common activities for DCAA are accounting system reviews (to make sure that the company can meet requirements of federal contracting rules), pre-award surveys, financial capabilities reviews (to make sure that the contractor has the financial strength and backing to perform on a contract), floor checks (timesheet audits conducted in person by a DCAA auditor) and incurred costs audits (where contractors have submitted detail of their actual indirect rates for a fiscal year compared.)

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What is DCAA compliance?

When the DCAA performs an audit or a pre-award survey of a government contractor, they are assessing the contractor's compliance with the Federal Acquisition Regulations (FAR). The FAR is the principal set of rules in the Federal Acquisition Regulation System. This system consists of sets of regulations issued by agencies of the Federal government to administer what is called the "acquisition process," the process through which the government purchases ("acquires") goods and services.

The FAR outlines the requirements of contractors during the acquisition process:

  • for selling to the government,
  • the terms under which the government obtains ownership, title and control of the goods or services purchased,
  • rules on specifications, payments and conduct,
  • actions regarding solicitation of bids, and
  • payment of invoices.

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Why is DCAA compliance so important for government contractors?

If a contractor is not in compliance with the FAR, they may be precluded from future government contracts or teaming arrangements with other contractors. It is also possible for DCAA to suggest to the Contracting Officer to stop payments on work that is in progress or disallow costs on completed contracts. Therefore, it is critical for all contractors both large and small to comply with the FAR. Review the DCAA Publication "Information for Contractors" on DCAA's website at www.dcaa.mil for a look at requirements when working with DCAA auditors.

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Is DCAA getting tougher on government contractors?

Yes, DCAA has changed the grading scale for accounting system audits from allowing degrees of non-compliance and offering suggestions for compliance, to an all or nothing, pass/fail grading system.

According to a DCAA memorandum (www.dcaa.mil/mmr/08-PAS-043.pdf): “DCAA will no longer report inadequate in part opinions. In addition, the audit report will identify the portions of the system affected by the deficiencies and recommend that the contracting officer disapprove the system (if applicable) and pursue suspension of a percentage of progress payments or reimbursement of costs… Further, suggestions to improve the system will no longer be reported in internal control audit reports.”

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Who is my Contracting Officer?

An Authorizing Contract Officer (ACO) is the representative assigned by the government to be your company’s representative for all contracts. The Contracting Officer is listed on your contract, and is the individual who signs the contract on behalf of the federal government. Some of your interaction may include people who work for the contracting officer, such as Contract Administrators or Contracting Specialists. The Contracting Officers Technical Representative (COTR) is responsible for making sure that the work is performed as agreed. However, it is best not to rely on the COTR for information regarding the administration of the contract such as funding, modifications, period of performance end dates and task or delivery orders, since only the Contracting Officer can approve those changes.

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Are QuickBooks and Peachtree approved by DCAA?

DCAA is generally less concerned about the software in use; rather, what they really look at is the process as a whole. They look for your ability to be able to properly accumulate and allocate costs to government contracts and properly screen out unallowable (unreimbursable) costs.

Basically, DCAA comes down to keeping track of the information they ask you to monitor. QuickBooks and Peachtree have the ability to do this just as well as any program. Just like any other program, garbage in = garbage out. The time and money you spend up front to do it right will far outweigh the costs of fixing it so you can be DCAA compliant later on.

It is important to remember that your bookkeeping software is only one tool and must be augmented with policies and procedures which comply with FAR and CAM.

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What is the best way to modify QuickBooks and Peachtree to meet DCAA standards? Is there additional software I need to purchase?

No, you do not need additional software to meet DCAA standards. All you need is a qualified person to set up your chart of accounts and customer/job and item lists, as well as knowledge of the DCAA regulations.

These three lists are really the only modifications that need to be completed. Having the knowledge to know where items are placed in correct accounts is a little more complicated than in standard GAAP accounting. We may also suggest a timekeeping system that keeps track of your employees' time.

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What if I need "catch-up" accounting?

Most businesses are a few months behind in their bookkeeping when they come to DSS. That is precisely why they need us - because it is difficult to stay on top of your books and run a demanding business! Getting caught up is simple - you send us the source documents (bank statements, credit card statements, etc.) for the missing months, and your DSS bookkeeping manager will take it from there, catching you up and getting you current so you have an accurate picture of your business finances.

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Wouldn't I be better off hiring an in-house bookkeeper?

In most cases, no. To hire an in-house bookkeeper, first you must find that person, check their credentials, negotiate a salary, hire and train them, and manage them. That can be very expensive both in time and money for a business owner. You must also provide office space, a desk, a computer, and software for them to use. You incur payroll tax expenses, vacation and sick time, and the cost of other benefits for that employee. If the person you hire is part-time, you must manage their hours and will only have access to them when they are at work. If they go on vacation, get sick, or leave your employ, you may have a large gap in your accounting and payroll. Furthermore, in some cases, there can be security concerns when only one person has access to all your business financial information, data, bank accounts, statements, and checks.

DCAA System Solutions' clients find that our affordable and efficient accounting services, combined with the continuity, security, and reliability of working with an outsourced accounting solution, are a far better value than hiring an in-house person.

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How much does it cost?

Our services are billed at an hourly rate determined by the nature of the work involved. Because your personal DSSmstaff accountant is committed to staying within your allotted budget, you are never surprised by an unexpected bill. We'll tailor an accounting package and price based on your needs. We save each of our clients money every month. Find out how you can benefit, too.

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What about security?

DCAA Systems Solutions utilizes state-of-the-art security and anti-fraud measures on par with major financial institutions. This has worked so well that we have never had a single incident to give our clients concern! In fact, we guarantee that your financial information and data is far more secure with DSS than it would be when handled in-house with bookkeeping personnel and minimal security measures in place.

Here are some specifics:

DSS requires logins and passwords, making casual access to your financial information, source documents, payroll data, and other information impossible.

DSS implements multiple firewalls between the Internet and our programs and data storage. Other electronic security measures add still more hurdles and obstacles.

In short, your data is safe with us - we protect it with generations of accounting experience and commitment, combined with the latest in cutting-edge security technology.

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How do I separate my commercial and government direct costs in my accounting system?

You don't. For the most part, direct costs are direct costs whether or not such costs are for government or commercial activities. Some agencies are different where IR&D costs are included as direct costs (NIH is one), while other agencies allow you to include IR&D in indirect costs provided that these costs are allowable, allocable and reasonable. Your chart of accounts does not have to delineate between commercial and government, in terms of direct costs, although you should track costs by respective customer and customer type within your accounting system since you are required to maintain your direct costs by contract.

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What is the difference between a provisional and actual indirect rate?

A provisional rate is a temporary rate that allows you to be reimbursed by the government based on a multiplier of a direct cost or costs depending on your indirect rate structure. However, for flexibly-priced contracts (such as cost-plus-fixed-fee contracts – CPFF), you need to file an actual rate proposal within six months of your year-end to “settle up” between your provisional and actual indirect rates. Any financial requirements occur after the award has completed its period of performance and the actual indirect rates for the years included in the period of performance have been audited. If you are owed money, the government will reimburse you any amounts owed up to the award amount. If you owe the government funding, you would need to write a check for the excess.

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What is the difference between a fixed-price (FFP) and a cost-plus-fixed-fee (CPFF) contract?

A fixed price contract is a contract based on the awardee performing certain milestones or deliverables and being paid an amount for each milestone or deliverable. Fixed price contracts are not tied to cost, but rather action as required under the contract. Therefore, all cost justification occurs during the proposal/awarding phase of your federal award. Cost-plus-fixed-fee contracts are reimbursable types of contracts where your company is reimbursed for direct costs, plus an indirect cost percentage reimbursement depending on your indirect rate structure, plus a profit percentage (also known as fee).

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What is an adequate accounting system?

While this depends on the agency and auditor, an adequate accounting system is typically a system that has centralized data, contemporaneous transactional processing, adequate segregation of duties, ability to track costs by direct, indirect (by cost pool and base) and unallowable costs, and track direct costs by federal award or commercial activity (job costing). While there are awardees who maintain their accounting system on a decentralized basis such as an accounting system supported by numerous external documents (such as Excel®), and some agencies or auditors may determine this to be adequate, such a system increases the likelihood of errors in accounting and the risk of under/overcharging the government.

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What is the difference between my payroll service and labor distribution?

Your payroll service merely computes your gross pay, withholds and may or may not expedite taxes and tax return filings, and deducts net pay, employee and employer payroll taxes and other fees from your bank account. Your payroll services are only related to labor distribution for “gross payroll” only. Your labor distribution system takes the gross payroll and distributes the gross pay to each labor category by direct (by contract), indirect (by indirect cost pool) and unallowable categories for purposes of reimbursement. Labor distribution does not have anything to do with payroll taxes, tax return filings, or deductions from your bank account.

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How do I know if I have to prepare an Incurred Cost Submission for DCAA?

Generally, if you have a prime contract with the FAR Allowable Cost and Payment Clause 52.216-7 or you are a subcontractor with flow-down provisions from the prime, you will need to complete an Incurred Cost Submission.  An incurred cost submission is a way to submit your indirect rates for audit each fiscal year.  In completing the ICE (Incurred Cost Electronically) for DCAA, you will provide contract detail tied to your income statement with indirect rate calculations.

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What is the deadline for submitting an Incurred Cost Proposal?

The Incurred Cost Submission, which is submitted electronically and known as Incurred Cost Electronically (ICE), must be submitted within six months of the end of the contractor’s (not the government’s) fiscal year.

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What is the difference between overhead and General and Administrative (G&A) costs?

Both are classified as indirect costs; that is, they cannot be directly applied to any specific contract. The difference is that G&A refers to that portion of your indirect costs that apply to your whole operation; whereas overhead applies to a portion of your operation. Examples of overhead are: utilities, rent, added insurance, leased equipment. All apply to a specific function or cost within your organization. General liability insurance, legal costs and state/federal taxes, for example, would be classified as G&A.

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What are the differences between DoD and NASA costs?

NASA uses the DCAA guidelines for DoD agencies on costs with one exception: in accordance with FAR 31.205-10(a)(2), NASA regulations say that facilities cost of money cannot be included in the cost basis for calculating profit/fee when it is included as a cost item in the contractor's proposal.

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Call 410-590-5000 today, or complete our Accounting Estimate Form for an evaluation of your DCAA accounting needs.

We will discuss your specific requirements and tailor a proposal to your business.

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