DCAA Small Business Requirements

The Defense Contract Audit Agency (DCAA) is usually engaged to evaluate the design of a small business’s accounting system prior to a contract being awarded. In order for a contractor to “pass” a pre-award audit, they need to demonstrate that their accounting system meets the criteria detailed in SF 1408 (http://www.acquisition.gov/far/html/FormsStandard41.html) during its first meeting with DCAA.

An acceptable accounting system is defined in DFARS 252.242-7006 as “a system that complies with the system criteria in paragraph (c) of this clause to provide reasonable assurance that

  • Applicable laws and regulations are complied with;
  • The accounting system and cost data are reliable;
  • Risk of misallocations and mischarges are minimized; and
  • Contract allocations and charges are consistent with billing procedures.”

It further defines a “Contractor’s system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting compliance with applicable laws, regulations, and management decisions.”

The requirement that all direct and indirect costs be properly segregated and allocated to contracts is one of the biggest differences between commercial and DCAA bookkeeping. In addition, not all costs are allowed to be allocated, either directly or indirectly, to a contract.

The most common reasons that a company fails a DCAA audit are that contractors

  • Do not make interim (at least monthly) determination of costs charged through routine posting to books of account
  • Fail to properly segregate direct and indirect costs
  • Improperly do timekeeping
  • Fail to exclude unallowable costs
  • Fail to have procedures to ensure that subcontractor and vendor costs are only included in invoices if payments to subcontractors and vendors are made in accordance with the terms and conditions of the subcontract or bill and within 30 days of the payment request to the Government

It is important to have a bookkeeper that is familiar with the requirement in order to satisfy a DCAA audit. Not passing the audit will either delay or prevent you from getting a contract award.