DCAA Compliance FAQ’s

SAP For Government and Defense Contractors

1. Who is the DCAA?
2. What is DCAA compliance?
3. Why is DCAA compliance so important for government contractors?
4. Is DCAA getting tougher on government contractors?
5. Who is my Contracting Officer?
6. Where is the best place to get an overview on the DCAA Audit process?
7. What is the difference between a provisional and actual indirect rate?
8. What is the difference between a fixed-price (FFP) and a cost-plus-fixed-fee (CPFF) contract?
9. What is an adequate accounting system?
10. What is the difference between my payroll service and labor distribution?
11. How do I know if I have to prepare an Incurred Cost Submission (ICS) for DCAA?
12. What is the deadline for submitting an Incurred Cost Proposal?
13. What is the difference between overhead and General and Administrative (G&A) costs?
14. What are the differences between DoD and NASA costs?
15. What is an incurred cost submission?
16. DCAA Checklists and Tools

 

Who is the DCAA?

DCAA stands for Defense Contract Audit Agency. DCAA reviews the accounting practices and accounting of government contractors, including prime contractors and subcontractors.

Even if the only federal contracts that your company has are Fixed Price contracts, you must have a DCAA-compliant accounting system that will support Cost Type contracts. Cost Type contracts include both Cost Plus and Time and Materials Contracts.

Common activities for DCAA are accounting system reviews (to make sure that the company can meet requirements of federal contracting rules), pre-award accounting system adequacy checklist, financial capabilities reviews (to make sure that the contractor has the financial strength and backing to perform on a contract), floor checks (timesheet audits conducted in person by a DCAA auditor) and incurred costs audits (where contractors have submitted detail of their actual indirect rates for a fiscal year compared.)

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What is DCAA compliance?

When the DCAA performs an audit or a pre-award survey of a government contractor, they are assessing the contractor's compliance with the Federal Acquisition Regulations (FAR). The FAR is the principal set of rules in the Federal Acquisition Regulation System. This system consists of sets of regulations issued by agencies of the Federal government to administer what is called the "acquisition process," the process through which the government purchases ("acquires") goods and services.

The FAR outlines the requirements of contractors during the acquisition process: for selling to the government, the terms under which the government obtains ownership, title and control of the goods or services purchased, rules on specifications, payments and conduct, actions regarding solicitation of bids, and payment of invoices.

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Why is DCAA compliance so important for government contractors?

If a contractor is not in compliance with the FAR, they may be precluded from future government contracts or working arrangements with other contractors. It is also possible for DCAA to suggest to the Contracting Officer to stop payments on work that is in progress or disallow costs on completed contracts. Therefore, it is critical for all contractors both large and small to comply with the FAR. Review the DCAA Publication "Information for Contractors" on DCAA's website at www.dcaa.mil.

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Is DCAA getting tougher on government contractors?

Yes, DCAA has changed the grading scale for accounting system audits from allowing degrees of noncompliance and offering suggestions for compliance, to an all or nothing, pass/fail grading system.

According to a DCAA memorandum: "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."

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Who is my Contracting Officer?

An Authorizing Contract Officer (ACO) is the representative assigned by the government to be your company's representative for all contracts. The Contracting Officer is listed on your contract, and is the individual who signs the contract on behalf of the federal government. Some of your interaction may include people who work for the contracting officer, such as Contract Administrators or Contracting Specialists. The Contracting Officer's Technical Representative (COTR) is responsible for making sure that the work is performed as agreed. However, it is best not to rely on the COTR for information regarding the administration of the contract such as funding, modifications, period of performance end dates and task or delivery orders, since only the Contracting Officer can approve those changes.

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 Where is the best place to get an overview on the DCAA Audit process?

The Audit Process Overview - Information for Contractors Manual under the Guidance tab on DCAA's website www.dcaa.mil is a great place to start.  The manual provides an introduction to DCAA, describes the attributes of the adequate labor and accounting system, price proposals, Cost Accounting Standard, contract financing and interim and final vouchers and incurred cost proposals.

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 What is the difference between a provisional and actual indirect rate?

A provisional rate is a temporary rate that allows you to be reimbursed by the government based on a multiplier of a direct cost or costs depending on your indirect rate structure. However, for flexibly-priced contracts (such as cost-plus-fixed-fee contracts – CPFF), you need to file an actual rate proposal within six months of your year-end to "settle up" between your provisional and actual indirect rates. Any financial requirements occur after the award has completed its period of performance and the actual indirect rates for the years included in the period of performance have been audited. If you are owed money, the government will reimburse you any amounts owed up to the award amount. If you owe the government funding, you would need to write a check for the excess.

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 What is the difference between a fixed-price (FFP) and a cost-plus-fixed-fee (CPFF) contract?

A fixed price contract is a contract based on the awardee performing certain milestones or deliverables and being paid an amount for each milestone or deliverable. Fixed price contracts are not tied to cost, but rather action as required under the contract. Therefore, all cost justification occurs during the proposal/awarding phase of your federal award. Cost-plus-fixed-fee contracts are reimbursable types of contracts where your company is reimbursed for direct costs, plus an indirect cost percentage reimbursement depending on your indirect rate structure, plus a profit percentage (also known as fee).

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 What is an adequate accounting system?

While this depends on the agency and auditor, an adequate accounting system is typically a system that has centralized data, contemporaneous transactional processing, adequate segregation of duties, ability to track costs by direct, indirect (by cost pool and base) and unallowable costs, and track direct costs by federal award or commercial activity (job costing). While there are awardees who maintain their accounting system on a decentralized basis such as an accounting system supported by numerous external documents (such as Excel®), and some agencies or auditors may determine this to be adequate, such a system increases the likelihood of errors in accounting and the risk of under/overcharging the government.

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 What is the difference between my payroll service and labor distribution?

Your payroll service merely computes your gross pay, tax return filings, and deducts net pay, employee and employer payroll taxes and other fees from your bank account. Your payroll is related to labor distribution for "gross payroll" only. Your labor distribution system takes the gross payroll and distributes the gross pay to each labor category by direct (by contract), indirect (by indirect cost pool) and unallowable categories for purposes of reimbursement. Labor distribution does not have anything to do with payroll taxes, tax return filings, or deductions from your bank account.

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 How do I know if I have to prepare an Incurred Cost Submission for DCAA?

Generally, if you have a prime contract with the FAR Allowable Cost and Payment Clause 52.216-7 or you are a subcontractor with flow-down provisions from the prime, you will need to complete an Incurred Cost Submission.  An incurred cost submission is a way to submit your indirect rates for audit each fiscal year.  In completing the ICE (Incurred Cost Electronically) for DCAA, you will provide contract detail tied to your income statement with indirect rate calculations.

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 What is the deadline for submitting an Incurred Cost Proposal?

The Incurred Cost Submission, which is submitted electronically and known as Incurred Cost Electronically (ICE), must be submitted within six months of the end of the contractor's fiscal year.

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 What is the difference between overhead and General and Administrative (G&A) costs?

Both are classified as indirect costs; that is, they cannot be directly applied to any specific contract. The difference is that G&A refers to that portion of your indirect costs that apply to your whole operation; whereas overhead applies to a portion of your operation. Examples of overhead are: utilities, rent, added insurance, leased equipment. All apply to a specific function or cost within your organization. General liability insurance, legal costs and state/federal taxes, for example, would be classified as G&A.

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 What are the differences between DoD and NASA costs?

NASA uses the DCAA guidelines for DoD agencies on costs with one exception: in accordance with FAR 31.205-10(a)(2), NASA regulations say that facilities cost of money cannot be included in the cost basis for calculating profit/fee when it is included as a cost item in the contractor's proposal.   

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 What is an Incurred Cost Submission?

For companies operating under cost type contracts, government agencies require an annual fiscal year audit to determine the over/under run of each cost type contract.