How to Make Your QuickBooks System DCAA CompliantSo, you won a government contract! Congratulations! However, you may findyourself wondering what comes next? After winning the contract, it is highly likelythat a torrent of thoughts will flood your mind. Hopefully, while preparing yourproposal, you did some pre-planning so you could act quickly upon hearing thegovernment agency’s decision. Perhaps you arranged project teams, put togetherlists of possible subcontractors, or even prepared bids for materials necessary forthe contract. However, there are several concerns that warrant careful attention,particularly related to the internal controls of your business. Considering thatDefense Contract Audit Agency (DCAA) compliance is critical, it is worthwhile totake a moment and examine this in detail.A primary concern of a newgovernment contractor is, “willmy current accounting systembe adequate?” If you pose thisquestion to software vendorswho sell packaged accountingsystems that claim to be allinclusive, odds are that youwill hear that your system isbroken, unusable, or not allowed under the rules of DCAA. The truth is – most ofthe time, these claims are simply not true.If you are a small to mid-size business, you don’t have to spend thousands ofdollars implementing a new accounting system to be DCAA compliant. Most ofthe time, you can configure your existing system. If you are using QuickBooks,which is one of the most common accounting systems, there are predefined stepsthat will allow you to maintain your current system and records. The truth is,
compliance has more to do with the way you configure a system than with thesystem itself.Let’s take a look at some of the basic government requirements so you canunderstand more about accounting systems and DCAA compliance:Who is the DCAA?When you work for the federal government, you are subject to the overview of theDCAA. This agency’s job is to evaluate contractors’ financial policies, procedures,and internal controls. Ultimately, they are responsible for performing audits thatcan identify opportunities for contractors to minimize, eliminate, or avoid costs.Contract TypesThe extent of the DCAA’s involvement is determined by the type of contract thatwill be awarded. The three types of contract are Fixed Price, Cost Reimbursable,and Time and Materials. The basic characteristics of the contracts are as follows: Fixed Price: As the name suggests, these contracts provide a fixed price that will be paid to the contractor regardless of the costs associated with the completion of the project. In very specific, appropriate cases, this price may be adjusted, but in general, what you see is what you get. Cost Reimbursable: In cost reimbursable contracts, the government agency will provide for the payment of allowable costs, up to a prescribed amount specified in the initial contract. An initial estimate is provided to the government so that they can obligate and appropriate quantity of funds. Time and Materials: Time and materials contracts provide for the payment of direct labor paid at specified rates and materials paid at cost. These contracts will always include a ceiling price for expenditures.Direct Versus Indirect CostsA significant portion of accounting for government contracts is the classification ofcosts, commercial and government, as either direct or indirect. In addition, all costsneed to be assigned to a “final cost objective.” Generally, a final cost objective is acontract. Accordingly, costs of a contract are comprised of direct costs and thecontract’s allocable share of indirect costs. Costs that are identified specifically
with a contract are direct costs of the contract and need to be charged directly tothe contract. Contractors need to spend some time and effort identifying exactlywhich costs are direct, because what remains is, by default, indirect.Certain costs are unallowable and must be separated in an accounting system.These costs include such things as alcohol, entertainment, interest expense, baddebts, advertising, lobbying costs, patent expenses, and more. Obviously, it isimportant to check to see if any of your costs fall under this category.ConsistencyThe government has no desire to pay for other commercial contract costs inaddition to their own costs. To that end, no final cost objective can have a directcost allocated to it if other costs were incurred for the same purpose in likecircumstances. No direct costs can be included in any indirect cost pool or beallocated to that or any other final cost objective. For example, if a commercialcontract has overrun costs, they cannot be charged to the indirect pool because thegovernment would then pay for a portion of what should have been a direct cost ofthe commercial contract.You may not have two sets of books and/or accounting practices for yourgovernment business and your commercial business. If you have a governmentcontract, then your entire system across your company must use the sameprocesses. If, for instance, you have a single government contract then your entirebusiness must use an approved timekeeping system that every employee usesconsistently, even if the majority of employees do not work on the contract. Thisregulation is in place because every business has overhead expenses, and becausethe government will pick up its share of the overhead, the entire organization mustbe compliant.Indirect RatesIndirect costs must be classified and grouped together into indirect cost pools:either an overhead cost pool or the general and administrative (G&A) cost pool.The pools are then allocated to final cost objectives using an indirect costallocation base that best links the cost pool to the cost objectives.
To allocate means to distribute overhead pool costs to contracts. In order todistribute indirect costs, the contractor must select an allocation base. There mustbe a relationship between the selected allocation base and the pool of costs to beallocated to contracts. For example, an engineering overhead pool would logicallybe allocated over total engineering direct labor dollars or engineering direct laborhours.Accounting Systems RequirementsNow that you know some of the criteria and terminology for governmentcontracting accountability, let’s take a look at how to configure your existingQuickBooks accounting system for compliance. Numerous other companies haveused QuickBooks to pass DCAA audits and continue to use it even as they havegrown.Project AccountingYou must set up your system for Project Accounting, which QuickBooks providesfor. All final cost objectives, or contracts, must be tracked on a per-project basis.Any direct cost transactions will require entering a general ledger account(separating direct costs from indirect) plus a customer job. QuickBooks will beable to track customer jobs, tasks, sub-tasks, etc. to whatever level is necessary.Chart of AccountsYou will need to revamp your Chart of Accounts. There will be two major expensecomponents: Direct and Indirect. Direct Costs are generally further broken downfor Direct Labor, Direct Subcontracts, Direct Travel, Direct Materials, and OtherDirect Costs. Indirect Costs are broken into logical categories that will supportyour indirect rate calculations. It is imperative that you have a separate series ofaccounts for all Unallowable Costs. Each type of unallowable cost should have itsown general ledger account.The indirect cost accounts must then be broken into pools, such as Fringe BenefitPool, Overhead Pool, and G&A Pool. Under each pool, there are separate accountsthat further logically group expenses into categories like Facility Costs, EquipmentCosts, etc. Within each of those categories, specific accounts should be set up forthings like Rent, Utilities, Property Taxes, etc.
Timekeeping and Labor DistributionHere is where specific DCAA approval is extremely important. While the DCAAdoesn’t require any particular software, it does have certain criteria that atimekeeping system must meet in order to be DCAA compliant. BecauseQuickBooks doesn’t offer a built-in, compliant time-tracking system, it isnecessary to use an external system that integrates well with QuickBooks and hasall controls required for DCAA approval.Following are the requirements for a DCAA-compliant timekeeping system. Keepin mind, the employee must input his or her own time. Managers cannot fill out orchange an employee timesheet. Employees must: Record time on a daily basis Provide, in writing, an explanation for any change to a prior day’s time records and approve those changes Enter the correct distribution of time by project numbers, contract number or name, or other identifiers for a particular assignment. To ensure accuracy, a listing of project numbers and their descriptions should be made in writing to the employee Record all hours worked, paid or unpaid Sign the timecard at the end of each work period and have the supervisor approve the time.It is important, particularly when evaluating third-party timekeeping solutions, tomake sure that all of these systems are in place, and preferably automated. Usuallyit is best to give the vendor a call and have them talk you through each of thesesteps personally. The best vendors will be happy to give you a live demo andanswer any questions you may have.For more information visit: http://budurl.com/xabg