Government Accounting System

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 audit.

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 system.

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 administrative expenses.

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 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.

The contract 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 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.

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

Essential Elements in Government Accounting.

Job Cost Tracking
HR & Payroll
Billings & Accounts Receivable
Valuable Elements
Dashboard / Key Performance Indicators
Budget / Resource Management
Time Management
Written Policies & Procedures

DCAA Requirements

Segregate direct from indirect costs

Direct Costs

Costs directly associated with performing the contract If you didn’t have the contract, would you still incur the cost?

Examples include;

Travel, Doesn’t matter if its billable or not

Indirect Expenses

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 Site
Overhead - Client Site
G & A
Subcontractor/Material Handling

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 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 pre-contract costs)

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 additional audits
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  

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