What Is DCAA Compliance? Requirements for Contractors

The Defense Contract Audit Agency (DCAA) serves as an independent agency within the U.S. Department of Defense to conduct contract audits and provide financial advisory services. Its core mission involves ensuring that taxpayer funds are spent responsibly on government contracts. The DCAA conducts audits and evaluates contractor proposals to ensure fair and reasonable prices for government goods and services.

Compliance with DCAA guidelines means adhering to specific financial and accounting regulations. This oversight helps maintain transparency and accountability in government contracting. The DCAA’s influence extends throughout the entire lifecycle of a government contract, from pre-award assessments to post-award reviews.

Organizations Subject to DCAA Oversight

Organizations primarily subject to DCAA oversight are government contractors and subcontractors engaging with the Department of Defense (DoD) and other federal agencies. The applicability of DCAA audits often depends on factors such as contract type, value, and specific clauses included in the contract.

Contracts like cost-reimbursable, time-and-materials, and certain fixed-price contracts frequently trigger DCAA scrutiny. For instance, pre-award audits may evaluate a contractor’s accounting system before a contract is even awarded, ensuring the capability to fulfill contract requirements. Post-award audits then verify incurred costs against contract terms.

The size and nature of the contract play a significant role in determining the extent of DCAA involvement. While large prime contractors are often subject to comprehensive reviews, smaller businesses with specific contract types may also face DCAA audits.

Core Compliance Requirements

Maintaining an adequate accounting system is a core requirement for DCAA compliance. Such a system must reliably capture, track, and report costs, demonstrating adherence to Generally Accepted Accounting Principles (GAAP). It should effectively segregate direct costs, which are directly attributable to a specific contract, from indirect costs, which are overhead expenses.

The accounting system also needs the capability to accumulate costs by individual contract or project. The system must identify and accumulate direct costs per contract, ensuring billed amounts do not exceed funding limitations. A logical and consistent method for allocating indirect costs to all contracts is also required.

Cost allowability is another significant area, governed by the Federal Acquisition Regulation (FAR) Part 31. For a cost to be allowable, it must meet criteria of reasonableness, allocability, and adherence to applicable accounting standards. Reasonableness implies the cost would be incurred by a prudent business person, while allocability means the cost benefits the contract or is necessary for overall business operations. Certain costs are expressly unallowable under FAR Part 31, including entertainment expenses, alcoholic beverages, charitable contributions, fines and penalties, and certain lobbying costs. These unallowable costs must be identified and excluded from any billings or proposals to the government.

Cost Accounting Standards (CAS) provide uniform standards for measuring, assigning, and allocating costs to government contracts. While not all contractors are subject to CAS, those with negotiated contracts exceeding certain thresholds, such as $7.5 million for a “trigger” contract or over $2 million unless exempt, must comply. CAS ensures consistency in cost accounting practices and applies to the contract itself, not necessarily the contractor or agency.

Accurate and supportable billing practices are also necessary. The billing system must ensure that only allowable and incurred costs are billed, supported by proper documentation. This means the system should track billed amounts against contract awards and compare estimates to actuals.

A compliant timekeeping system is essential, especially for cost-reimbursable and time-and-materials contracts. All hours worked by employees, including both direct and indirect labor, must be tracked daily and accurately recorded. Timesheets require employee certification and supervisor approval, and any changes must be documented with clear reasons for adjustment. Records should be retained for a specified period, typically a minimum of three years after final payment.

DCAA Audit Procedures

The DCAA audit process typically begins with a formal notification to the contractor. This notification, often a letter or email, outlines the audit type, scope, and requested information, setting the stage for the engagement.

Following notification, an entrance conference is typically scheduled between DCAA auditors and contractor management. During this meeting, the audit’s purpose and scope are discussed, along with the estimated duration and the types of records and data the auditors will examine. This conference allows for mutual understanding and the designation of a primary point of contact for audit matters.

The fieldwork phase involves the auditors’ in-depth examination of the contractor’s financial records, internal controls, and accounting policies. Auditors test transactions to verify compliance with FAR, CAS, and specific contract terms. This phase may include reviewing documentation, interviewing personnel, and sometimes conducting unannounced “floor checks” for timekeeping audits.

Upon completion of fieldwork, an exit conference is generally held to discuss preliminary audit findings with the contractor. This meeting provides an opportunity for the contractor to offer additional information, clarify any issues, or challenge findings with verifiable proof before the audit report is finalized.

The final step is the issuance of the official DCAA audit report. This document details the audit findings, conclusions, and any recommendations. The report’s findings can influence contract negotiations, payment, or future contract awards.