Are Your Cost Accounting Systems DCAA Compliant? What Government Contractors Need to Know

Securing and maintaining federal contracts entails unique expectations, particularly regarding how your costs are tracked, recorded, and reported. The Defense Contract Audit Agency (DCAA) is responsible for reviewing government contractor accounting systems for compliance with federal regulations. Because these audits focus on transparency, accuracy, and accountability, DCAA-compliant accounting systems are critical for contractors to remain eligible for contracts and demonstrate reliability to the government. 

What is DCAA Compliance? 

The DCAA operates under the Department of Defense (DoD) as a financial watchdog. The DCAA makes sure taxpayer dollars are spent appropriately by verifying that contractors’ accounting practices comply with federal regulations, including the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS). The primary goal of a DCAA audit is to confirm that costs charged by contractors to the federal government are allowable, allocable, and reasonable.  

How the DCAA Evaluates Cost Accounting System Compliance 

Three primary sources of standards govern an acceptable accounting system. These requirements are defined in DFARS 252.242-7006, which outlines 18 specific requirements for covered DoD contracts. Underlying all of these requirements, FAR Part 31 establishes the fundamental cost principles for allowability, allocability, and reasonableness, forming the baseline for compliant accounting systems. The third source, Standard Form 1408, is the DCAA’s pre-award accounting system adequacy checklist. It assesses whether a contractor’s accounting system meets the government’s requirements and the 18 criteria outlined in DFARS 252.242-7006. 

Together, these documents help make sure that government contracts, from processes to controls to reporting, are compliant and accurate.  

What Makes an Accounting System DCAA-Compliant? 

No specific accounting software is inherently DCAA-approved; rather, DCAA approval is based on whether your accounting system meets the criteria outlined in its three primary sources. Because of its complexity and operational demands, most contractors choose to outsource their accounting systems. 

Key Components of a DCAA-Compliance Accounting System

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

• Segregation of direct and indirect costs 
• Job-cost accumulation by contract 
• General ledger control with monthly cost postings 
• Logical and consistent allocation of indirect costs 
• Exclusion and control of unallowable costs 
• Timekeeping and labor charging with supervisory approval 
• Labor distribution by cost objective 
• Cost tracking by contract line-item number (when required) 
• Segregation of pre-production and production costs 
• Indirect rate calculation and provisional billing rate management 
• Billing accuracy and compliance with contract terms 

GAAP Compliance 

A contract’s accounting system must also adhere to Generally Accepted Accounting Principles (GAAP) and FAR. Unless it’s subject to the Cost Accounting Standards, in which case CAS requirements govern the accumulation and allocation of costs. 

Common Audit Findings  

The complexity of DCAA compliance requirements makes accounting system audits a significant risk for federal contractors. The most frequent audit findings typically involve timekeeping deficiencies and inadequate controls over unallowable costs. Timekeeping findings often stem from improper labor charging, incomplete or untimely timesheet entries, and a lack of documented supervisory review. Similarly, inadequate controls over unallowable costs often result from failure to properly identify, segregate, and exclude unallowable expenses from cost pools and billings. In addition, auditors frequently cite untimely posting of costs, insufficient documentation, and billing the government for costs before vendor or subcontractor payment, all of which can undermine overall accounting system adequacy. 

The Importance of DCAA Compliance 

Maintaining a DCAA-compliant cost accounting system means more than passing an audit; it builds a business’s credibility with the government and demonstrates the financial discipline needed to compete for and win federal contracts. Its impact extends further: noncompliance can lead to disallowed costs, penalties, delayed or withheld payments, and increased audit scrutiny, all of which directly impact cash flow and the ability to secure future contracts. 

DCAA compliance is an ongoing process that must evolve as contracts, revenue, and operations grow. Simultaneously, managing this process internally is complex and resource-intensive, leaving contractors vulnerable to audit findings and compliance risks. By combining federal contracting knowledge with an experienced outsourced accounting team, we simplify complex DCAA compliance requirements, freeing you to focus on securing and maintaining additional contracts and growing your business with confidence.  

If you have any questions or need assistance, contact us today using the form below.