Nothing helps a business’ long-term outlook like having a dependable, long-term customer. For many companies, doing work for the federal government provides a stability not always found in the civilian sector. If you’ve set your sights on breaking into this field, DCAA approval is something you will have to face. But what exactly is the DCAA? How to do you become DCAA-approved?

DCAA: What It Is

DCAA stands for Defense Contract Audit Agency. The DCAA“provides audit and financial advisory services to Department of Defense (DoD) and other federal entities responsible for acquisition and contract administration.”

In plain English, the DCAA helps ensure that taxpayers get what they’re paying for and that funds are not wasted. It’s essentially a way to help keep contractors and businesses who work with the government as honest as possible.

Originally, the DCAA was primarily defense-oriented, and came about as a result of each military branch having its own unique audit system in place. As time went on, however, the program has spread far beyond its original military application, and now includes just about everything service and labor-oriented.

As a result, time-tracking makes up around 75 percent of what’s involved in working with the DCAA. Many of its policies are designed to facilitate accurate results. For example, the DCAA’s policy is that time must be tracked and tallied every day, not at the end of the week. While some companies or individuals may balk at such regulations, often they’re best-practices standards that should be applied even for work outside of the DCAA.

DCAA: How to Get Approved

There are twelve important steps to being DCAA-approved and being able to take on government contracts. In each case, these steps are non-negotiable. You cannot gain approval without meeting every single requirement.

1. Separate Direct Costs from Indirect Costs

You must prove that your system segregates direct and indirect costs. This includes separating the costs by account, having a policy describing criteria for separating the costs and having personnel that understand it.

2. Accumulate Contract Costs by Cost Element and by Cost Objective or Contract

You must maintain an adequate job costing system that is integrated with your accounting system.

3. Homogenous Indirect Cost Pools and Allocation Bases

The DCAA website explains this one as: “This means the indirect costs must be accumulated into separate indirect cost pools combining functions that are not disparate.  This means the functions must be similar and have a similar relationship to the cost objectives being managed.  A violation would be combining manufacturing functions with engineering or services functions.  These are disparate functions and are not homogenous.”

4. Contract Costs Must be Controlled by the General Ledger

In most instances, a modern accounting package such as Quickbooks or Microsoft Dynamics GP will do this automatically.

5. Demonstrate Compliance with Generally Accepted Accounting Principles

One important factor to keep in mind is that cash-based accounting methods are not permitted. All DCAA work must be accounted for using the accrual method.

6. Pre-Contract Cost Accounting

This basically means that pre-contract costs must be recorded separately.

7. Maintain an Adequate Timekeeping System

As stated earlier, almost 75 percent of what’s involved in working with the DCAA involves time-tracking. This is where Journyx, and our time-tracking software, factors in.

8. Adequate Labor Distribution Systems

You must be able to product a labor distribution report, based on your timekeeping software.

9. Accounting for Unallowable Costs

You must be able to meet the requirements of FAR 31.201-6.  “This means that contractors must segregate costs determined to be unallowable based on FAR 31.2 separately from direct and indirect cost pools.”

10. Interim Accumulation of Costs

In short, this means your accounting system needs to be updated, or post transactions, on at least a monthly basis.

11. Track Costs by Contract Line Item

While this does not apply to all contracts, some may require the tracking of costs by Contract Line Item (CLIN).

12. Limitation of Cost and Funds/Invoicing Clauses

Again, not all but many contracts include the Limitation of Costs and Funds clauses. This requires you to track the funding and cost of the project and notify the contracting officer when the costs reach 85 percent of the funding.

As this list shows, becoming DCAA-approved can be quite the involved process. However, as stated, many of the requirements are best-practices that should already be in place anyway. Many of the other requirements are easily met simply by using appropriate software.

If you’re willing to put in the time and effort, you may find that being a DCAA-approved contractor is worth it, providing your company with a steady stream of income.