Landing a government contract can be a game-changer for your business. However, with it comes the responsibility of adhering to stringent regulations, particularly those enforced by the Defense Contract Audit Agency (DCAA). A DCAA audit can seem daunting, but with thorough preparation, you can navigate it successfully. This top ten list outlines the crucial areas you need to have in order to demonstrate compliance and ensure a smooth audit process.
1. A Robust Accounting System:
At the heart of DCAA compliance lies your accounting system. It needs to accurately capture, record, and report all financial transactions in accordance with Generally Accepted Accounting Principles (GAAP) and specific government contracting requirements.
- What to have ready: Your documented accounting system policies and procedures, chart of accounts, and evidence of consistent application. Ensure your system can segregate direct and indirect costs, allocate indirect costs appropriately, and track costs by contract, project and funding by CLIN/ACRN/SLIN.
2. Timekeeping System and Labor Distribution:
Labor costs are a significant component of most government contracts. Your timekeeping system must accurately track employee hours worked, including direct and indirect labor, and allocate these costs to the correct cost objectives.
- What to have ready: Detailed timekeeping policies, timesheets (electronic or manual) with proper approvals, and a clear audit trail of any corrections. Be prepared to demonstrate how labor costs are distributed to specific contracts and indirect cost pools.
3. Adequate Internal Controls:
Strong internal controls are essential to prevent and detect errors and fraud. The DCAA will assess the effectiveness of your internal control structure across various areas, including accounting, procurement, and payroll.
- What to have ready: Documentation of your internal control policies and procedures, segregation of duties, authorization limits, and evidence of regular monitoring and review of these controls.
4. Purchasing System and Subcontract Management:
If your contracts involve subcontractors or significant purchased materials, your purchasing system will come under scrutiny. You need to demonstrate that you obtain fair and reasonable prices and comply with all relevant regulations.
- What to have ready: Your purchasing policies and procedures, vendor agreements, basis for vendor selection, price analysis documentation, and flow-down of applicable contract clauses to subcontractors.
5. Indirect Cost Rate Calculations and Support:
Government contractors with cost type projects recover indirect costs (overhead, general and administrative (G&A), etc.) through predetermined or provisional indirect cost rates. You must have a well-documented, consistent and supported methodology for calculating these rates.
- What to have ready: Your indirect cost rate calculations, supporting schedules, allocation bases, and documentation justifying the reasonableness and allocability of your indirect costs.
6. Contract Files and Supporting Documentation:
For each government contract you hold, maintain organized and complete contract files. These files should contain all relevant documents from the initial award through final payment.
- What to have ready: Copies of contract awards, modifications, statements of work, invoices submitted, payment records, and any other correspondence related to the contract.
7. Compliance with the Federal Acquisition Regulation (FAR):
The FAR is the primary regulation governing government contracting. You must demonstrate a thorough understanding of and compliance with applicable FAR clauses.
- What to have ready: Evidence of your understanding of relevant FAR clauses, policies and procedures implemented to ensure compliance, and training records for employees involved in government contracts.
8. Forward Pricing Rate Agreements (FPRAs) and Provisional Billing Rates:
If you have an FPRA with the government, ensure you are adhering to its terms. If you bill using provisional rates, be prepared to support your proposed rates and reconcile them at the end of your accounting period.
- What to have ready: Your FPRA document (if applicable), documentation supporting your provisional billing rates, and the calculations and support for your annual indirect cost proposal.
9. Inventory Management (if applicable):
For contracts involving government property or contractor-acquired property, you need a system to accurately track and manage inventory.
- What to have ready: Your inventory management policies and procedures, records of inventory receipts, issues, and balances, and documentation of any physical inventory counts and reconciliations.
10. Prepared and Knowledgeable Staff:
Your team’s understanding of DCAA requirements and your company’s compliance processes is crucial. They should be prepared to answer auditors’ questions accurately and efficiently.
- What to have ready: Ensure key personnel involved in accounting, contracts, and project management are familiar with DCAA audit procedures and your company’s compliance documentation. Conduct internal training sessions to prepare them.
By diligently preparing these ten key areas, you significantly increase your chances of a successful DCAA audit. Remember that proactive compliance is not just about passing an audit; it’s about building a strong, ethical, and sustainable business that can thrive in the government contracting arena.