Michigan Association of CPAsBusiness EdgeCompliance
May 25, 2007
Volume 4, No. 5
In this issue...
 -  Crisis Leadership Reduces Stress and Improves Performance
 -  Common Pitfalls in Buying a Business
 -  Business Continuity: An Attainable Goal Through Leveraging Home-Based Professionals
 -  DCAA: What is It and How You Can Comply
 -  Succession Planning: The First Decision in Getting Somewhere is Determining Who is Going to Drive
DCAA: What is It and How You Can Comply

By Curt Finch


What is DCAA?

The Defense Contract Audit Agency (DCAA), under the authority, direction, and control of the United States Secretary of Defense, performs all contract audits for the United States Department of Defense (DoD). DCAA also provides contract audit services to some other government agencies.

The purpose of the agency, simply, is to avoid the purchase of $300 hammers and $1,000 toilet seats. Business services companies, such as software and management consultancies that sell project management and other services to government agencies, need to comply with a number of DCAA requirements if they want to avoid failing an audit. As taxpayers, we should all be thrilled that our government has put processes in place to avoid overpayment and being defrauded.

Today, the DCAA consists of approximately 4,000 people located at more than 300 field audit offices throughout the world. Much more data is available at www.dcaa.mil.

Maintaining Compliance
In order to be compliant with DCAA and pass a potential audit, your company must have documented policies and procedure. There should also be a system that charges labor for hourly time, which could conceivably be on paper, but in practice, rarely is. There should also be certain accounting and billing system properties and employees who are trained in certain aspects of compliance, such as tracking their time on a daily basis.

Many software vendors will claim that their software will make you DCAA compliant. While they probably help, software alone will not accomplish this. For example, if you have time sheet software that enables daily entry of time, that doesn’t mean your employees will use it. The company policies and procedures must also be in place and enforced in order for the software to be effective.

Costs—especially labor hour costs—must be allocated and accumulated separately by various categories, including direct and indirect, and by contract. Indirect costs, such as the costs of accounting, billing, payroll and benefits must be consistently documented and allocated across the direct cost items. Reports must be generated at least monthly. Unallowable expenses must be identified and excluded by policy.

There are many regulations to comply with that explain how to estimate projects, bid on them, bill for them, and allocate costs for them.

Here is an excerpt from one of many DCAA documents, DCAAP 7641.90 Information for Contractors:

2-302.2 Recommended Timekeeping Policy

  1. The supervisor should approve and co-sign all timecards.
  2. The supervisor is prohibited from completing an employee's timecard unless the employee is absent for a prolonged period of time on some form of authorized leave. If the employee is on travel status, the supervisor for the employee may prepare a time sheet. Upon returning, the employee should submit his or her time sheet and attach it to the one prepared by the supervisor.
  3. The guidance should state that the nature of the work determines the proper distribution of time, not availability of funding, type of contract, or other factors.
  4. The company policy should state that the accurate and complete preparation of timecards is a part of the employee's job. Careless or improper preparation may lead to disciplinary actions under company policies as well as applicable federal statutes.

If your eyes glazed over while reading this, you’re not alone.

Governmental Regulations
The Federal Acquisition Regulations (FAR), are a series of regulations issued by the federal government that concern the requirements of contractors for selling to the government; the terms under which the government obtains ownership, title and control of the goods or services purchased; and rules on specifications, payments and conduct and actions regarding solicitation of bids and payment of invoices. Many of the DCAA documents found at the DCAA homepage refer to FAR.

An additional term often used is CAM. This stands for the DCAA Contract Audit Manual. It is an instruction book for auditors who work on behalf the government. It discusses standards for auditing, how to plan for an audit, cost accounting standards, auditing of estimates and proposals, statistical sampling techniques for audits, who can obtain audit reports, how they’re distributed and what they should look like.

DCAA regulations are often very specific about how adherence to FAR will be audited. The FAR contains thousands of pages and consists of two parts: 1) the general acquisition regulations that govern all transactions with the government; and 2) the regulations issued by a specific federal agency that govern transactions with that agency. One of the best-known examples of special regulations is the Defense Federal Acquisition Regulation Supplement (DFARS) which is used by the Department of Defense.

The purpose of the FAR is to explain how the government is to acquire a particular product or service; how the quality and price are to be judged; and how certain prohibited practices, such as cost of lobbying, cost of financing, kickbacks, undue influence, corruption and other illegal behavior are not to be conducted. It may also include requirements for purchases to be made in the United States; for large organizations to use small businesses, including women- and minority-owned and disadvantaged business enterprises as subcontractors; to not discriminate against certain classes of people; to engage in certain practices such as minority hiring and affirmative action, and other requirements depending on the type of contract and its dollar value.

Systems are Key
If all this sounds daunting, that’s because it is. However, many small companies pass DCAA audits all the time and there are people and technologies that can help you do so. Like most things in business, it’s cheaper to solve the problems in advance of an audit when the pressure and time criticality of the exercise is less onerous.

It is important to remember that one of the most critical portions of a DCAA audit concerns detailed labor and cost center tracking. Technology solutions can automate the costly process of capturing and reporting contract-specific data and provide critical supporting documentation for DCAA audits. Defense contractors must have labor systems with the following internal controls:

  • Effective methods to monitor the overall integrity of the system
  • Effective employee awareness training programs
  • Effective procedures for labor approvals
  • Effective procedures for labor cost accounting, cost accounting standards and contract terms

Getting a system in place to monitor these issues is a requirement if you intend to sell services to the government. The sooner you start the better.

About the Author
Curt Finch is the CEO of Journyx, a provider of Web-based software located in Austin, Texas that automates billing, payroll and project management by tracking time, expenses and mileage. Curt can be reached at curt@journyx.com.


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