DCAA-Compliant Cost Accounting Systems FAQs

What is DCAA compliance?

The Defense Contract Audit Agency (DCAA) operates under the Department of Defense (DoD) and reviews government contractor accounting systems to verify that costs charged to the federal government are allowable, allocable, and reasonable. DCAA compliance means your accounting practices satisfy federal regulations, including the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS). Maintaining a DCAA-compliant accounting system is a condition of eligibility for federal contracts.

Why does DCAA compliance matter for government contractors?

DCAA compliance goes beyond passing an audit. A compliant accounting system builds credibility with the federal government and demonstrates the financial discipline required to compete for and win federal contracts. Noncompliance can result in disallowed costs, penalties, delayed or withheld payments, and increased audit scrutiny, which directly affect cash flow and your ability to secure future work.

What standards govern a DCAA-compliant accounting system?

Three primary sources establish what an acceptable accounting system looks like:

• Defense Federal Acquisition Regulation Supplement (DFARS) 252.242-7006 outlines 18 specific requirements for covered Department of Defense contracts.
• FAR Part 31 establishes the fundamental cost principles for allowability, allocability, and reasonableness.
• Standard Form 1408 is the DCAA’s pre-award accounting system adequacy checklist, used to assess whether a contractor’s system meets the government’s requirements and the 18 criteria in DFARS 252.242-7006.

Together, these documents form the foundation for DCAA-compliant government contract accounting.

What does a DCAA-compliant accounting system need to do?

A DCAA-compliant cost accounting system must be capable of the following:

• Segregating direct and indirect costs
• Accumulating job costs by contract
• Maintaining general ledger control with monthly cost postings
• Allocating indirect costs in a logical and consistent manner
• Identifying, segregating, and excluding unallowable costs from government billings
• Tracking labor and timekeeping with supervisory approval
• Distributing labor by cost objective
• Tracking costs by contract line-item number when required
• Segregating pre-production and production costs
• Calculating indirect rates and managing provisional billing rates
• Billing accurately and in compliance with contract terms
• Adhering to Generally Accepted Accounting Principles (GAAP) and FAR—or, if subject to Cost Accounting Standards, CAS requirements governing cost accumulation and allocation

Is there DCAA-approved accounting software?

No specific accounting software is inherently DCAA-approved. DCAA compliance is determined by whether your accounting system meets the criteria outlined in DFARS 252.242-7006, FAR Part 31, and Standard Form 1408—not by the software you use. Because compliance requirements are complex and operationally demanding, most government contractors choose to outsource their accounting systems to qualified professionals.

What are the most common DCAA audit findings?

The most frequent audit findings typically involve two areas: timekeeping deficiencies and inadequate controls over unallowable costs.

Timekeeping findings often result from improper labor charging, incomplete or untimely timesheet entries, and the absence of documented supervisory review. Inadequate controls over unallowable costs typically stem from failure to properly identify, segregate, and exclude unallowable expenses from cost pools and billings. Post-award auditors also commonly cite untimely posting of costs, insufficient documentation, and billing the government for costs before vendor or subcontractor payment, all of which can undermine the adequacy of the accounting system and put contract eligibility at risk.

What happens if my accounting system is not DCAA-compliant?

Noncompliance with DCAA requirements can lead to disallowed costs, financial penalties, delayed or withheld payments, and heightened audit scrutiny. These consequences directly affect cash flow and can jeopardize your ability to compete for and maintain federal contracts.

Is DCAA compliance a one-time process?

No. DCAA compliance is ongoing and must evolve as your contracts, revenue, and operations grow. Changes in contract type, company size, or cost structure can all affect your compliance requirements, making it important to continuously monitor and update your accounting system and internal controls—including your incurred cost submission obligations at fiscal year-end.

How can KatzAbosch help with DCAA compliance?

Managing DCAA compliance internally is complex and resource-intensive, leaving contractors vulnerable to audit findings and compliance risks. Our government contracting team combines federal contracting knowledge with outsourced accounting support to help government contractors meet DCAA requirements, reduce audit exposure, and focus on securing and growing their contracts. If you have questions about your cost accounting system or DCAA compliance requirements, contact us using the form below.

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