The first misconception that requires clearing-up is that there is no such
thing as "Defense Contract Audit Agency -
(DCAA) approved" accounting
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 administrative expenses.
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
2. Accumulate and segregate direct costs by contract and by contract
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 costs.
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.
by contract accounting of direct and indirect costs being set up must be
reconciled at least monthly with the Company's General Ledger.
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
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 differant. 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
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
Contracting Officer can
approve or disapprove a system without DCAA involvement.
FAR 15.407-5 Estimating Systems
DFAR 215.407-5-70(b) (1) Disclosure, maintenance, and review requirement
FAR 32.503.3 Initiation of progress payments and review of accounting system
FAR 44.3 Contractors’ Purchasing System Review
DFAR 244-305-70 Purchasing system
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?
Doesn’t matter if its billable or not
Allows for the recovery of the cost of operations not associated with a
Based on simple math
No two companies are the same.
Types of Indirect Costs
Overhead – Company Site
Overhead – Client Site
G & A
Segregate & accumulate costs by contract
Logical & consistent allocation of indirect expenses
Accumulation of costs under general ledger control
Timekeeping system that identifies labor hours and labor cost
Labor distribution system that charges direct & indirect labor to what was
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 pre-contract
Types of Expenses
G & A