Any business that sells services to the government today needs to know about DCAA. The Defense Contract Audit Agency (DCAA), under the authority, direction, and control of the United States Under Secretary of Defense, performs all contract audits for the United States Department of Defense (DoD). DCAA also provides contract audit services to other government agencies.
The purpose of the agency is basically to avoid the purchase of $300 hammers and $1,000 toilet seats. Business services companies, such as software and management consultancies that sell project management and other services to government agencies, must comply with a number of DCAA requirements if they want to be able to pass an audit.
These requirements are (in true government style) long and complicated, and but basically boil down to tracking labor costs as scrupulously as possible. This is where timekeeping becomes so important for DCAA compliance.
In order to be compliant with DCAA regulations and pass a potential audit, a company must have the following:
- Documented policies and procedures that are scrupulously followed
- A labor charging system for hourly time (which could conceivably be on paper, but in practice rarely is)
- Specific accounting and billing system properties
- Employees who are trained in certain aspects of compliance (such as tracking their time on a daily basis)
In addition, costs (especially labor hour costs) must be allocated and accumulated separately by various categories, including direct vs. indirect and per-contract. Indirect costs (such as the costs of accounting, billing & payroll, HR and benefits personnel) must be consistently documented and allocated across the direct cost items. Reports must be generated at least monthly. Unallowable expenses must be identified and excluded by policy.
There are many regulations to comply with which explain how to estimate, bid on, bill for, and allocate costs for projects as evidenced by the following excerpt from the DCAAP 7641.90 Information for Contractors:
2-302.2 Recommended Timekeeping Policy
- The supervisor should approve and cosign all timecards.
- The supervisor is prohibited from completing an employee’s timecard unless the employee is absent for a prolonged period of time on some form of authorized leave. If the employee is on travel status, the supervisor for the employee may prepare a time sheet. Upon his or her return, the employee should turn in his/her time sheet and attach it to the one prepared by the supervisor.
- The guidance should state that the nature of the work determines the proper distribution of time, not availability of funding, type of contract, or other factors.
- The company policy should state that the accurate and complete preparation of timecards is a part of the employee’s job. Careless or improper preparation may lead to disciplinary actions under company policies as well as applicable Federal statutes.
Remember that while many software vendors claim that their software will make you DCAA compliant, software alone will not accomplish this. For example, if you have timesheet software that enables daily entry of time, that doesn’t necessarily mean that your employees will use it. Company policies and procedures must also be in place and enforced in order for the software to be effective.
Many DCAA documents make reference to the Federal Acquisition Regulations (FAR). These are a series of regulations issued by the federal government that concern the requirements of contractors for selling to the government, the terms under which the government obtains ownership, title and control of the goods or services purchased, and rules on specifications, payments, conduct, and actions regarding solicitation of bids and payment of invoices.
The FAR is a rather large document that contains two parts: the general acquisition regulations that govern all transactions with the government in general, and the regulations issued by a specific federal agency that govern transactions with that agency. One of the best-known examples of the latter is the Defense Federal Acquisition Regulation Supplement (DFARS), which is used by the Department of Defense.
The purpose of FAR is to specify exactly how the government is to acquire a particular product or service and how it is to be judged in terms of quality and price. It is also to ensure that the government does not pay for certain prohibited practices such as the cost of lobbying or financing, and to prevent kickbacks, undue influence, corruption and other misconduct. It may also include requirements to make purchases in the United States, to use smaller organizations as subcontractors (including disadvantaged, women- and minority-owned businesses), to not discriminate against certain classes of people, and other requirements depending on the type of contract and its dollar value.
How to Pass an Audit
DCAA regulations are usually very specific about how adherence to FAR will be audited. CAM, an acronym for to the DCAA Contract Audit Manual, is used quite frequently. This is an instruction book for auditors who work on behalf of the government. It discusses how to plan for an audit, auditing standards, cost accounting standards, auditing of estimates and proposals, statistical sampling techniques, who can obtain audit reports, how they are distributed and what they should look like.
It is important to remember that one of the most critical portions of a DCAA audit concerns detailed labor and cost center tracking, including DCAA-compliant timekeeping. Technology solutions can automate the costly process of capturing and reporting contract-specific data and provide critical supporting documentation for DCAA audits. Defense contractors must have labor systems with specific internal controls: an effective method to monitor the overall integrity of the system, an employee awareness training program, and procedures for labor approvals and labor cost accounting (cost accounting standards, contract terms).
Getting a system in place to monitor these issues is imperative if you intend to sell services to the government, and the sooner you start, the better.