DCAA Compliance for Government Contractors Using QuickBooks Online

Key Details: The government contracting industry demands strict adherence to complex regulations. One key aspect of compliance is creating an accounting system that is compliant with the Defense Contract Audit Agency (DCAA) standards. As such, implementing and maintaining a DCAA compliant accounting system should be at the forefront of all government contractors’ minds.

One of the most widely used accounting systems among small to medium sized government contractors is QuickBooks Online (QBO) due to its affordability and easy-to-use platform. This article outlines how QBO can be used to help achieve DCAA accounting system compliance. Contractors should note that the discussion below is intended to be used as a general guide. Contractors are encouraged to speak with an advisor to determine additional steps required for DCAA compliance. For more information or help setting up your QBO, contact us today.

Background on the DCAA

The DCAA is a government agency that works under the Department of Defense (DoD). The primary purpose of the DCAA is to perform contractual and financial audits on behalf of other agencies when required. The DCAA performs a wide range of audits such as forward pricing, incurred cost, and pre-award surveys.

What is DCAA Compliance?

Though the term “DCAA compliance” is a buzzword in the government contracting industry, it is important to note that the DCAA does not certify contractors as “compliant.” DCAA compliance essentially means that the contractor can follow the agency's recommendations and guidance to follow various federal regulations and is prepared for audits. For the purposes of this article, we are focusing on accounting system compliance.

The consequences of noncompliance could expose contractors to audits or investigations. There could also be significant legal consequences and financial losses. As such, contractors are encouraged to ensure their accounting system is aligned with DCAA standards. These standards ensure that contractors can, among other things:

1. Maintain accurate and complete records of billings and costs.
2. Segregate direct, indirect, and unallowable costs accurately and consistently.
3. Implement robust timekeeping and labor distribution systems with regular reviews, approvals, and reconciliations.
4. Provide audit-ready documentation.
5. Follow the regulations set forth in the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS).

How to Configure and Use QBO to Boost Compliance

QBO is not inherently DCAA-compliant, but with proper configuration, supporting processes, policies and procedures, and internal controls, it can be adapted to meet many of the requirements. Contractors should note that these configurations should be paired with detailed policies and procedures and internal control documents that match the processes in QBO. Additionally, adequate segregation of duties, internal reviews, and approval processes should be implemented to bolster compliance.

Chart of Accounts and Cost Pools Configurations

Segregate direct costs, indirect costs, and unallowable costs by using different account codes. Below is an example of a typical chart of account structure.

• 1XXX: Assets
• 2XXX: Liabilities
• 3XXX: Equity
• 4XXX: Revenue
• 5XXX: Direct Costs
• 6XXX: Fringe
• 7XXX: Overhead
• 8XXX: G&A
• 9XXX: Unallowable

This chart of accounts structure allows government contractors to easily distinguish between direct costs (accounts beginning with “5”), indirect costs (accounts beginning with "6”, “7”, or “8”), and unallowable costs (accounts beginning with “9”). Direct costs are specifically identifiable with a particular final cost objective, such as a project or a contract. Indirect costs, on the other hand, get accumulated into an indirect cost pool such as fringe, overhead, or general & administrative (G&A) expenses.

Contractors should aim to have a standardized CoA that is easy to follow. This will improve efficiency and lower errors made during the calculation of indirect rates. This will also provide for the ability to properly segregate costs. Contractors should continuously review and maintain their account structure and cost allocation to ensure costs are being captured consistently and correctly in cost pools.

Timekeeping System Configuration

Timekeeping is one of the most scrutinized areas in DCAA audits. As such, contractors should consider the following:

• Consider utilizing QuickBooks Time or another third-party timekeeping application that can integrate with QBO.
• Ensure policies and procedures outline that employees are required to enter time daily, and that supervisors are required to review and approve employee timesheets.
• Ensure that employee labor is identified by intermediate or final cost objectives through using unique project or time codes that are only made available to employees who are authorized to record time to a project.
• Enable the generation of an audit trail to show employee timesheet edits and supervisor approvals.
• Provide regular employee timekeeping training.

In addition to the above, contractors should aim to regularly reconcile their timekeeping system reports to payroll reports, job cost ledgers, and the general ledger.

Project and Job Costing Configuration

Job costing refers to tracking revenue and expenses by contract, job, task order, etc. This can be done in QBO by setting up each government contract as a “customer” or “job.” Additionally, class codes can be assigned to revenues and costs to record billings and direct costs by contract. Contractors are encouraged to regularly reconcile the job cost report (P&L by Job) to the general ledger. Any revenue or costs not assigned will show up in a “Not Specified” column and should have a customer code assigned to it.

Conclusion and Action Plan

Contractors should note that implementing the above items will not automatically make your accounting system DCAA compliant. There are additional steps that should be taken such as:

• Maintaining your books in accordance with generally accepted accounting principles (GAAP). This would include reporting on accrual basis and ensuring you can print basic financial reports.
• Ensure customers have unique codes to easily distinguish between contracts, modifications, task orders, etc. when recording billings and costs.
• Regularly review where indirect costs are being accumulated to ensure they are classified consistently and accurately within each cost pool.
• Ensure employees record total time worked to the correct projects by implementing regular supervisor reviews and providing training.
• Ensure direct costs are recorded by contract so total costs incurred for a given project can be reported monthly.
• Provide relevant accounting staff with training to understand and identify unallowable costs, so they are not charged to a contract.
• Segregate preproduction costs from production costs through different account numbers.
• Track monthly costs and billings to support requests for progress payments.
• Ensure your accounting system is in full operation.
• Perform routine reconciliations of indirect rate calculations with accounting system records to verify accuracy and maintain consistency between computed rates and recorded costs.
• Verify that system configurations, processes, and reporting are aligned with documented accounting policies and procedures.

For further information, expertise, or assistance with your QBO account, contact Ryan & Wetmore today.

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About Rosie Cheng
Senior Finance Consultant

Rosie Cheng is a Senior Finance Consultant at Ryan & Wetmore. She focuses on government contracting services and produces many of the firm’s government contracting newsletters. Rosie earned her Master of Science in Management from Georgetown University and a BBA from William and Mary.