DCAA Compliance Guide 2025: Accounting System Requirements & Audits
Complete guide to DCAA compliance for government contractors. Learn about DCAA audits, accounting system requirements, allowable costs, timekeeping, and how to prepare for DCAA reviews.
Quick Answer: DCAA Compliance
DCAA (Defense Contract Audit Agency) audits contractors to ensure proper use of government funds. Cost-reimbursement and time-and-materials contracts require compliant accounting systems. Key requirements include proper timekeeping, cost segregation, and tracking of allowable vs. unallowable costs.
What is DCAA?
The Defense Contract Audit Agency provides audit services for DoD and other federal agencies. DCAA reviews contractor accounting systems, costs, and business practices to protect the government from overpaying.
When DCAA Applies
- →Cost-reimbursement contracts
- →Time-and-materials contracts
- →Labor-hour contracts
- →Fixed-price contracts requiring cost data
DCAA-Compliant Accounting System
Your accounting system must meet the criteria in SF 1408 (Pre-Award Survey of Prospective Contractor Accounting System) to be considered adequate for government contracting.
SF 1408 Requirements
Segregation of Costs
Separate direct from indirect costs by contract
Timekeeping
Accurate labor distribution to contracts
Cost Accumulation
Accumulate costs by contract and job
Unallowable Costs
Identify and exclude unallowable costs
Billing System
Accurate and timely billing procedures
Internal Controls
Proper authorization and approval processes
Allowable vs. Unallowable Costs
FAR Part 31 defines which costs can be charged to government contracts (allowable) and which cannot (unallowable).
Cost Categories
Generally Allowable
- • Direct labor on contract
- • Direct materials
- • Reasonable travel costs
- • Fringe benefits
- • Reasonable G&A costs
Generally Unallowable
- • Entertainment costs
- • Alcoholic beverages
- • Bad debts
- • Donations
- • Lobbying costs
Reasonableness Test
Even allowable costs must be reasonable in nature and amount. Would a prudent business person pay this amount in a competitive environment?
Timekeeping Requirements
Proper timekeeping is one of the most scrutinized areas. Employees must accurately record time worked on each contract.
Timekeeping Best Practices
Daily Recording
Employees should record time daily, not from memory at week's end
Contract-Level Detail
Time recorded to specific contract or indirect pool
Supervisor Approval
Timesheets reviewed and approved by supervisors
Correction Procedures
Documented process for timesheet corrections with audit trail
Floor Checks
DCAA may conduct unannounced "floor checks" to verify employees are working on the contracts they're charging. Ensure employees understand the importance of accurate time recording.
DCAA Audit Types
Common DCAA Audits
Pre-Award Accounting System Survey
Evaluates if your system is adequate before contract award
Incurred Cost Audit
Reviews actual costs charged to contracts annually
Forward Pricing Rate Audit
Evaluates proposed rates for new contracts
Post-Award Audit
Reviews costs and compliance during contract performance
Incurred Cost Submission
Contractors with cost-reimbursement contracts must submit an Incurred Cost Electronically (ICE) model within 6 months after fiscal year end.
- →Due 6 months after your fiscal year end
- →Uses DCAA ICE model format
- →Basis for final rate determination
Frequently Asked Questions
Do I need DCAA compliance for fixed-price contracts?
Generally no, unless the contract requires certified cost or pricing data or has cost accounting standards clauses. Fixed-price commercial item contracts typically don't need DCAA compliance.
How do I prepare for a DCAA audit?
Maintain organized records, ensure policies are documented and followed, conduct internal audits, and respond promptly to auditor requests. Consider getting a pre-audit assessment.
What happens if my system is found inadequate?
You may need to implement corrective actions before receiving cost-reimbursement contracts. For existing contracts, billing may be withheld until issues are resolved.
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