Do Small Businesses have to have a Defense Contract Audit Agency approved Accounting System?

Small Businesses, depending on the situation,  need to have their accounting systems approved by the Defense Contract Audit Agency.

In some cases the Contracting Officer can approve or disapprove a system without DCAA involvement.

Approval of any contractor's system is not the same when it comes to small vs. large when you are talking about the three systems (accounting, estimating or purchasing).
DCAA Contract Audit Manual (CAM) DCAAM 7640.1

Not only are the systems different, they are used differently when it comes to small and large business and commercial vs. non-commercial.

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

 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 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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Government Accounting System

Account Statement
Users Manual

U.S. Government Accountability Office

Thousands of Federal Contractors Abuse the Federal Tax System,

Defense Contract Audit Agency
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