DCAA compliance: timekeeping is where the audit starts

DCAA compliance describes an accounting system that satisfies the audit standards applied to United States government contractors — principally the ability to identify and segregate costs correctly, and to support every charge with contemporaneous records. It matters most on cost-reimbursable work, where the government pays actual costs and therefore audits them.

The persistent misconception is that software can be certified compliant. It cannot: what is evaluated is the contractor’s system and practices as a whole, of which software is one part. Products advertised as compliant are products that make compliance achievable, which is a real distinction when a vendor’s marketing implies the problem is solved by purchase.

What DCAA compliance requires of the accounting system

• Separate direct costs from indirect costs, and accumulate direct costs by contract and by task.
• Allocate indirect costs through a consistent, documented pool and base structure.
• Identify and exclude unallowable costs from billings, while still recording them in the books.
• Reconcile the job cost ledger to the general ledger.
• Produce interim billings that agree with the underlying records.
• Support an annual incurred cost submission on cost-type contracts.
• Retain the records for the required period, per contract.

Timekeeping is the first thing examined

Labour is the largest cost on most services contracts and the least documented by its nature, so timekeeping practice is where an audit begins. The expectations are specific: employees record their own time, daily rather than reconstructed at week end, against the correct charge code; corrections are made by the employee with the reason recorded and the original visible; supervisors approve; and there is a written policy that people have been trained on. A floor check — an auditor asking an employee what they are working on and comparing it to the timesheet — is a routine procedure, and it is very hard to pass with a system where time is entered fortnightly from memory.

Unallowable does not mean unrecorded. Costs excluded from government billing — certain entertainment, lobbying, interest and others — must still be captured in the accounting records and identified as unallowable. A system that simply omits them cannot demonstrate that they were excluded properly.

Before the first cost-type award

A contractor pursuing its first cost-reimbursable contract is normally subject to a pre-award survey of accounting system adequacy — an assessment of whether the system is capable of accumulating costs correctly, made before any costs exist. That is a documentation exercise as much as an accounting one: the chart of accounts, the indirect rate structure, the timekeeping policy and the written procedures need to exist and to describe what the business actually does. Preparing them at the point of bidding rather than after the award is the difference between a survey that passes and an award that stalls.

Keeping the evidence

Ettex Books holds the ledger with direct and indirect segregation and job cost detail, Ettex Records keeps the written policies, training acknowledgements and the survey correspondence per contract, and the registration under which the contracts are awarded is covered in sam registration.

To be clear: this is bookkeeping and records, not a government contract accounting system, and none of it is audit advice. Contractors with cost-type work should expect to need a purpose-built product and an adviser who has been through the process; what this covers is understanding what is actually being examined.