The first misconception that requires clearing-up is that there is no such
thing as Defense Contract Audit Agency - approved accounting software.
DCAA does not approve accounting software.
What the Defense Contract Audit Agency does approve for a contractor
is how they utilize the accounting system and the various processes the
contractor is using.
"They approve the Contractors Accounting System."
There are certain software products that are widely used and
recognized in the government contracting industry; however, the purchase
of these products does not ensure passage or failure of a pre-award
Because of the nature of the types of contracts that are awarded (cost
reimbursable, time and materials, firm fixed price), the government
contracting industry imposes unique burdens on a contractor's accounting
Some Requirements of the Government Contract Accounting Process.
DCAA Contract Audit Manual (CAM) DCAAM 7640.1
1. Segregate direct costs from indirect costs.
Indirect costs include all costs that cannot be directly
attributed to a project, product, or contract. These include such
items as fringe benefits, overhead expenses, and general and
A direct cost is any cost that can be identified with a
final cost objective (i.e. a contract). Indirect costs cannot be
specifically identified with one final cost objective, but benefit
multiple cost objectives. Thus, your chart of accounts should be set
up to address this distinction.
2. Accumulate and segregate direct costs by contract and by
contract line item.
It is not enough to segregate costs by direct and indirect. The
direct costs must be further segregated on a contract by contract
basis and in some instances, on a contract line item basis.
3. A logical and consistent method for the allocation of indirect
Indirect costs need to be grouped into logical categories (i.e. fringe, overhead, G&A, etc.) then allocated to every contract based
on a defined methodology. An example of this would be to allocate overhead on the basis of direct contract labor dollars. Once
defined, though, the methodology should be consistently applied.
4. Costs must be accumulated under General Ledger control.
The contract by contract accounting of direct and indirect costs
being set up must be reconciled at least monthly with the Company's
5. A timekeeping system that identifies labor by cost objective
and allocates this time properly.
This is where many contractors systems falter. All employees'
time, whether direct or indirect, must be accounted for daily, by
the work activity being performed. If the charges are to indirect,
they must be allocated in a logical and consistent manner.
6. Interim determination of costs.
This means that the books should be closed at least monthly to
have a proper accounting of contract costs.
7. Segregation of unallowable costs.
FAR 31.205-6 details the various categories of unallowable
expenses. Contractors must ensure that unallowable costs are being
properly segregated in the accounting system from allowable costs.
Doing business with the federal government is different. If no one in your
organization has been through this process before or you are unaware of these
requirements, you should consider retaining the services of a consultant to
assist you with this process.
Do Small Businesses have to have a Defense Contract Audit Agency
approved Accounting System?
Approval of any contractor's system is not the same when it comes to
small vs. large when we are talking about the three systems (accounting,
estimating or purchasing). Not only are the systems different, they are
use differently when it comes to small and large business and commercial
vs. non-commercial. Depending on the situation, Small Businesses need to
have systems approved by the DCAA. In some cases the Contracting Officer
can approve or disapprove a system without DCAA involvement.
15.407-5 Estimating Systems
DFAR 215.407-5-70(b) (1) Disclosure, maintenance, and review
32.503.3 Initiation of progress payments and review of accounting
44.3 Contractors' Purchasing System Review
DFAR 244-305-70 Purchasing system
Essential Elements in Government Accounting.
Job Cost Tracking
HR & Payroll
Billings & Accounts Receivable
Dashboard / Key Performance Indicators
Budget / Resource Management
Written Policies & Procedures
Segregate direct from indirect costs
Costs directly associated with performing the contract If you
didn’t have the contract, would you still incur the cost?
matter if its billable or not
Allows for the recovery of the cost of operations not associated
with a specific job Based on simple math Conceptually perplexing No
two companies are the same.
Types of Indirect Costs
Overhead - Company
Overhead - Client Site
G & A
Logical & consistent allocation of indirect expenses
Accumulation of costs under general ledger control
system that identifies labor hours and labor cost
Labor distribution system that charges direct & indirect labor to
what was worked on
Monthly determination of costs charged to
contract through routine postings
Identification & exclusion of unallowable expenses
Identification of costs by contract line item or task
Segregation of pre - production costs from production costs (or
Types of Expenses
G & A
What happens if you don’t have an Acceptable Accounting System?
Award(s) can / will be delayed
You will be subjected to
Audit frequency will be increased (higher risk category)
Additional reporting burdens may be required
Payments can be delayed
Award can be canceled / terminated
Contract can be terminated during performance