Minority-owned businesses that work on government contracts can play an essential role in fostering inclusion and diversity in the marketplace. But these businesses often face unique challenges when navigating the audit process.
The Defense Contract Audit Agency (DCAA) ensures many proposal winners comply with laws, regulations, and contractual requirements. If you’re a diversity contractor who needs to prepare for a DCAA audit, read on for insights on what to expect during the process and how to comply as efficiently as possible with all relevant regulations.
Understanding DCAA audits
The DCAA conducts audits to verify the costs associated with government contracts. You can expect to face a DCAA audit any time you’re working on a cost-reimbursement contract, and the agency that’s considering hiring you wants to verify your proposed costs. (Fixed-price contracts are generally exempt from audits.) During an audit, the DCAA will:
- Review your firm’s compliance with the Federal Acquisition Regulation (FAR)
- Examine your firm’s financial information and transactional records
- Conduct employee interviews on topics such as timekeeping
Unique considerations for diversity contractors
Diversity contractors may face additional scrutiny during the DCAA audit process. Depending on the government agency you’re working with, the DCAA may pay particular attention to how closely you comply with set-aside programs and minority or diversity-related obligations. These obligations could include participating in mentorship programs, subcontracting with other minority or diversity-owned businesses, or promoting inclusion within your workforce.
The DCAA may also review your ownership structure and documentation to assess your eligibility for programs reserved for minority-owned or disadvantaged businesses. If so, you’ll need to provide evidence of your compliance with such requirements.
Six key steps for ensuring DCAA adherence
Keep in mind that the DCAA doesn’t directly certify compliance. But your firm will still need to be proactive in ensuring your adherence to regulations. Here are six key steps diversity contractors can take to prepare for a DCAA audit:
- Follow Generally Accepted Accounting Principles (GAAP)
It’s crucial to adhere to GAAP guidelines, especially regarding direct and indirect costs as specified in FAR parts 31.202 and 31.203. Your firm should review and understand GAAP compliance. If this isn’t your strong suit, consider hiring a CPA firm specializing in government contracting.
- Segregate direct and indirect costs
Your firm can facilitate the audit process by separating direct and indirect costs. Be sure to establish clear policies about what constitutes direct and indirect costs and record these costs accurately in your accounting software for easy review.
- Assign costs to projects or cost elements
Assigning costs to specific projects or cost elements rather than grouping them into a single account is essential. Maintaining this discipline will make tracking expenses easier and demonstrate compliance with contract requirements. Many contractors find it helpful to use a commercially available accounting solution to simplify this process.
- Comply with employee timekeeping requirements
You won’t likely pass a DCAA audit if you’re not keeping time accurately. Make sure your employees understand and comply with the DCAA's timekeeping requirements. Each employee should be responsible for recording their own time accurately, and supervisors should never record time on behalf of employees.
- Set up an accounting system for DCAA compliance
Does your accounting system align with the DCAA compliance process? Consider working with a CPA to:
- Establish or update your general ledger program
- Implement DCAA-compliant timekeeping practices
- Train your employees on proper timekeeping
- Establish government-compliant payroll practices
- Develop a system for performing indirect rate calculations
It’s also vital to document DCAA-compliant policies and procedures specific to your organization.
- Perform internal audits
By regularly performing internal audits like those conducted by the DCAA, your firm can identify and rectify any overlooked compliance issues. These audits can include floor checks and interviews with employees to verify their understanding of DCAA compliance requirements, particularly around timekeeping practices.
How your pricing software can help you prepare for a DCAA audit
To ensure that you can remain compliant and participate in government contracts, you need a game plan to help you prepare for a DCAA audit. By understanding the audit process, following accounting principles, segregating costs, and maintaining accurate records, you can streamline your audit preparation and demonstrate your commitment to compliance and inclusion in government contracting.
Let ProPricer take the load of DCAA audits off your shoulders. ProPricer Contractor Edition provides a standardized structure for pricing and rates that's easy to review during the audit process. In addition, with ProPricer, your team can ensure data is centrally housed in a relational database that assures consistent accuracy through reporting, total cost, and rate build-up. Request a 1:1 demo here.
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Discover the latest trends in government contracting and learn from industry leaders at the upcoming Government Contract Pricing Summit. See fascinating keynote sessions and live-panel discussions on the latest audit techniques, cutting-edge contracting technologies, speed-to-contract methodologies, and more. Take advantage of this opportunity to expand your network and knowledge. Join us from June 20-22 in San Diego, CA. Register now to secure your spot.