6 Things Every Small Government Contractor Should Know About DCAA Compliance

Starting and growing a small government contracting business presents many challenges. The world of government contracting is unlike any other business sector. It follows different procedures, uses different processes, and operates by different rules and customs.

For example, instead of going out and selling, government contractors engage in “contract capture”. And rather than selling directly to decision makers, they often review agency budgets for upcoming requirements and then attempt to configure their business to fill those needs. There’s another area in which government contractors stand apart from the rest of the marketplace — accounting system compliance.

When you run a small business in the United States, the regulatory burdens specific to your accounting process are relatively straightforward, and primarily concern your taxes. Outside of the IRS, there’s little ongoing regulation of your accounting unless your company has a complex ownership structure or intends to sell shares on a public stock market (in which case the Securities & Exchange Commission, or SEC, will apply its standards to your accounting activities).

This all holds true unless you run a government contracting business. Even the smallest government contractors are, at the end of the day, providing products and services in return for being paid with federal tax dollars, and as a result of that they must comply with a different set of standards.

The most widely applied standard for government contractor accounting is that maintained by the Defense Contract Audit Agency (DCAA). Although the DCAA exists to provide audit and contract review services for the U.S. Department of Defense, the DCAA’s standards are also applied across other areas of government contracting as a result of their being referenced in many rules issued through the Federal Acquisition Regulations (FAR).

Therefore, nearly every government contractor will need to become familiar with — and compliant with — the DCAA standards. Here are six things every small government contractor needs to know about DCAA compliance:

1. Compliance applies across the company.

One of the major requirements of the DCAA is that every employee in the company record daily time entries, accurate project-level time allocations, and a clear record of both unpaid as well as paid time. What many small firms forget is that this standard applies across the entire company and for every single employee — whether they are working on a government contract or not. That universal applicability is a common theme: even if your business engages in both government and civilian sector work, the government expects your entire business to be following its standards.

2. Precision in time and labor tracking is a top priority.

Since most government contracting work is delivered through professional services, the government is extremely concerned that contractors follow highly precise standards for time and labor tracking. That means establishing standards in employee handbooks, procedure manuals, workplace signage and employee orientations.

It also means using software tools that can record and classify information precisely enough. Also required is a clear submission and approval process for time tracking, as well as a detailed audit trail. In fact, nearly 75% of DCAA compliance requirements relate specifically to time tracking.

3. Reporting needs to demonstrate effective internal controls.

When you run a weekly or monthly project time report, can you answer these questions?

  • Which staff were working, for how long, on what projects?
  • The status of all time sheets (which time sheets have and have not been submitted).
  • Any changes, edits or adjustments made to submitted time sheets — and who made what changes, when and with what authority.
  • Who is authorized to approve a time sheet – and who actually did.

Hopefully, the answers are all ‘yes’ because that’s just some of what you need to be able to do, in order to be compliant with DCAA. In addition, you need to be able to show that your time tracking system provides fixed, unchangeable time records that cannot be tampered with or invisibly edited at a later date.

4. Uncompensated overtime is the devil in the details.

Under DCAA standards, the total amount of time that your personnel spend on a project is what is used as the basis for your overall project cost — even if you (or others on the team) don’t get paid directly for each of those hours and minutes. For example, high-level salaried personnel may not be paid overtime – but if they work extra hours on a project, that needs to be accurately recorded. This is critical for tracking allocated vs. actual hours, and ensuring contract compliance.

5. There are three forms of evaluation.

DCAA compliance is evaluated against one of three contract types, so one of the best ways to ensure that you’re up-to-snuff is to test your own accounting systems and standards against each format. Those contract types are:

  • Fixed price
  • Cost-reimbursable
  • Time and materials

The two key tools necessary to achieve this are an accounting system that can support these three contract formats, and an integrated time tracking system that can provide the level of detail and audit trail management required.

6. It’s an all-or-nothing game.

There was a time when DCAA compliance reviews were performed against a grading system, and government contractors could come up short in a few areas and still be deemed in compliance as long as they addressed their identified compliance deficiencies adequately.

Those days are gone, and now DCAA uses a pass/fail standard. Not only that, but recommendations for improvement are no longer being included in internal control audit reports — meaning that if you don’t make the cut, you’re probably flying blind as you try to get back into compliance.

The bottom line is that DCAA compliance is a high bar to meet and maintain. The best way to succeed is to plan from the start and get your business processes aligned with your business systems.

Use the right technology and couple it with comprehensive and consistent employee training to ensure that your entire accounting process is staying ‘in the game’ with DCAA compliance standards.

Learn more about accounting, bookkeeping and outsourced CFO solutions for small government contractors from Haines & Lagerquist CPAs here.

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Image Credit: Boris Dzhingarov (Flickr @ Creative Commons)
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