For companies looking for long-term clients and a more stable recurring income, DCAA (Defense Contract Audit Agency) compliance can be a real boon.
Originally created in 1965 to eliminate auditing overlap between the various branches of the military, the DCAA is now the gateway to virtually all service and labor contracts for the U.S. Government. Its role is primarily to help keep contractors honest and ensure taxpayers aren’t taken for a ride.
Unfortunately, for many contractors the rules of being a DCAA compliant contractor have changed immensely in the last decade. This has made it harder to keep DCAA compliant status.
How the Rules Have Changed
In times past, the DCAA’s grading system allowed for degrees of non-compliance and would even offer suggestions on how a contractor could improve their grade by improving their compliance deficiencies.
Under the new rules, the DCAA has changed the grading system to a pass/fail system. Contractors can no longer have degrees of non-compliance and still be DCAA-approved.
According to the DCAA,
“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.”
The Cost of Losing DCAA Compliance
In addition to the obvious loss of potential business, losing DCAA compliance can have severe consequences.
Writing for the Virginia Society of Certified Public Accountants, Tom Marcinko and Bill Foote, CPA highlight some of the costs: “Entering the government market without understanding the accounting and other unique requirements exposes the company to the possibility of failing to win business, losing money and civil or (in extreme cases) criminal sanctions.”
How to Stay Remain in DCAA Compliance
There are three contract types you should be aware of that the DCAA evaluates in their audits:
- Fixed Price
- Cost Reimbursable
- Time and Materials (which includes overhead costs such as expenses that are recorded).
The best way to avoid problems with the new regulations is to be prepared and ensure complete DCAA compliance before a DCAA audit.
David Goldstein, President at InLine Financials LLC, writes:
“The most effective way to prepare for a DCAA audit is to standardize company accounting procedures and employ a comprehensive system for tracking and recording employee time long before the audit process initiates.
“Accounting and time-keeping software is crucial to passing even the pre-award survey of the DCAA audit. Companies capable of demonstrating a history of comprehensive accounting and time management practices often experience minimized oversight throughout the audit process. Contrarily, contractors with less established practices for recording costs, tracking and allocating materials, billing, and monitoring labor undergo a more wearisome audit experience. If a company’s accounting software proves incapable of handling DCAA mandated rigor, a comprehensive review of the company’s manual system will be required.”
This underscores the need for companies to be using best practices when it comes to time tracking, especially since time tracking makes up nearly 75 percent of what’s involved in DCAA compliance.
Losing DCAA compliance can be a devastating loss to your organization as well as your clients’ well-being. By being proactive and addressing potential issues before an audit, you can ensure your company stays compliant in spite of the stricter regulations.
Military Image via Shutterstock