D.C.A.A. Compliance for Beginners

If you are a government contractor, you need to be aware of the Defense Contract Audit Agency (D.C.A.A.)  The D.C.A.A. approves your accounting system for the purposes of offering products and services to the federal government.  They may also audit the results coming from your accounting system for the purposes of determining compliance with Federal Acquisition Regulations (F.A.R.)

If you are new to the government contracting world, get used to acronyms.  Here is another one – D.O.D. (Department of Defense).  The D.C.A.A. has jurisdiction over the accounting for D.O.D. contracts, N.A.S.A. (yes, the space people), and some other agencies.  Making your accounting system D.C.A.A. compliant seems a daunting task, but here are first three steps toward making your accounting system compliant.

First,  your accounting system must segregate direct, indirect costs, and unallowable costs.  Direct costs are the actual costs of performing a contract such as contract labor, contract materials, and potentially travel related to a contract.  For example, if you provide  IT support to a federal agency, the labor costs of the people you have assigned to providing the services is contract labor and thus a direct cost.  The salary you pay to your bookkeeper is not a direct cost, since he / she is not providing services directly under the contract.

However, your bookkeeper’s salary is a perfect example of an indirect cost.  An indirect cost does not directly benefit a contract but supports the execution of a contract.  Telephone, office supplies, payroll taxes, employee benefits, and rent are typically considered indirect costs.

Unallowable costs are costs determined under F.A.R. to not be chargeable as either a direct or indirect cost.  Interest expense and income taxes are considered unallowable costs as well as alcoholic beverages.  No drunken fun allowed on the fed’s dime.

Key to segregating these three types of costs is setting up the chart of accounts in your accounting system properly.  You should group the accounts for your profit and loss statement by these types of costs.  For instance, accounts numbered 5000 through 5999 might be designated as direct costs.  Accounts 6000 – 8999 might be designated as indirect costs and accounts 9000 through 9999 could be used as unallowable costs.

Second, you must account for direct costs by contract.  For instance, if you have five contracts, you must be able to produce reports showing each type of direct cost by contract.  Accounting software typically helps you with this through job costing functionality.  Accounting for federal contractors has much in common with construction contractors in this regard.

Third, you must have a D.C.A.A. compliant time tracking system for labor.  The F.A.R. sets forth a host of timekeeping requirements, which are enforced by the D.C.A.A.  Most off the shelf accounting software packages, like the time tracking in QuickBooks, are not compliant by themselves.  Most require some sort of additional procedures, sometimes manual, to provide D.C.A.A. / F.A.R. compliance.  You can, however, find specialized D.C.A.A. compliant time tracking software that may integrate with your accounting software.

As you can see, understanding the basics of D.C.A.A. compliance for federal contractors isn’t difficult. Compliance requires up front planning when designing your accounting system.  Most small contractors can accomplish this planning in a day or less.  Ask your CPA for help if you don’t feel confident in this area.

Thanks for reading!  If you have any questions or need assistance setting up your accounting system, please contact Michelle Evans at mevans@TotalAccountingCare.com or (703) 818-8284.  Pleae also visit our web site at www.TotalAccountingCare.com