Setting Up An Adequate DCAA Compliant Accounting System

Most companies have an accounting system that is considered adequate, generally speaking, for tax reporting and conducting business in a commercial setting. The company’s CFO or accounting and bookkeeping staff are accountable internally for accuracy in reporting, and in operating a proper accounting department.

The world of accounting systems in the federal contracts arena is far more specific, however. When we see the word “adequate” used within this context, it refers to an accounting system sufficiently designed to meet the particular reporting and accounting needs as defined by the U.S. Government’s Accounting Office. Further, it describes the accounting system parameters required for DCAA Compliance. Thus, the word adequate takes on a more specific meaning in U.S. Government Accounting parlance.

Federal Government cost-reimbursable contracts require the accounting system to be adequate for accumulating and billing costs per the Federal Acquisition Regulation (FAR). An adequate accounting system, in this particular sense, provides improved cost information. The benefits of such a system include improved management information and decision-making capabilities, as well as compliance with statutes, regulations, and laws. Good cost information provides insight as to which contracts or jobs are profitable and to what extent. Company managers can make better operational decisions that have a positive impact on the bottom line, based on reliable financial data. In the present budgetary environment, government customers that have trust in an organization’s cost control and performance are more likely to commit funding to reliable suppliers.

The Defense Contract Audit Agency (DCAA) auditor will evaluate the design of an organization’s accounting system following the elements of the Standard Form (SF) 1408.

Standard Form 1408 provides guidance in the form of a checklist for securing an approval for the adequacy of a company’s accounting system. This checklist, as stated at the DCAA website, “is used for contractors new to government contracting that have cost-reimbursable contracts, or for contractors that are receiving progress payments based on cost. The checklist assesses whether the requirements for an adequate accounting system have been met.” The completed SF 1408 is used by DCAA auditors to verify compliance with the requirements for an adequate accounting system.

The government provides a host of resources to help both the new and the seasoned federal contractor to ensure an adequate accounting system is in place. The DCAA pre-award accounting system adequacy checklist is available at www.dcaa.mil. For starters, if you have not already done so, your accounting team should download the document and use it as a tool in preparation for DCAA approval of your accounting system.

Your Adequate Accounting System should:

• Be in accordance with Generally Accepted Accounting Principles (GAAP), accrual basis;
• Segregate direct costs from indirect costs;
• Identify and accumulate direct costs by contract or job;
• Employ a logical and consistent method of allocating indirect costs to contracts;
• Accumulate costs under general ledger control;
• Employ a timekeeping system that identifies employees’ labor by contract;
• Employ a labor distribution system that charges direct and indirect labor to the appropriate accounts;
• Allow for an interim determination of costs charged to government contracts through at least monthly posting of books of account;
• Exclude costs charged to government contracts that are not allowable under the terms of FAR Part 31 (Contract Cost Principles);
• Identify costs by contract line item (CLIN) and by units, if required by the contract;
• Segregate preproduction costs from production costs;
• Generate cost information sufficient to compare with contract cost limitations;
• Be able to support progress payment billings; and
• Generate adequate, reliable data sufficient to price follow-on contracts.

• A sound internal control environment, accounting framework, and organizational structure;
• Reconciliation of subsidiary cost ledgers and cost objectives to the general ledger;
• Approval and documentation of adjusting entries; and
• Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices.

Your Accounting Staff needs to have training or experience with the Federal Contract Cost principles. It is an important element of government invoicing to exclude unallowable costs and to ensure all allowable incurred expenses have adequate support documentation during cost reviews (audits).

PS: About “Non-Compliance”

If your cost accounting system is inadequate for the government, or non-compliant, you may be locking yourself out from future federal contract opportunities or putting your current contracts at risk. Profits or cashflow are at risk due to potential penalties or payment delays, which could ultimately cause a net loss or cash shortage. The negative impact of non-compliance is both direct and indirect:

• Ineligible for contract award
• Suspension of interim billings
• Disallowance of costs
• Increased audit oversight
• Contract termination

Summary