DCAA Accounting System Requirements Pre Awards.pdf

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Accounting System

Requirements and Pre-

Award Audits

Further information is available in the

Information for Contractors Manual under Enclosure 2

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Prior to First Cost Type

Contract Award

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Contracting Office or DCMA conducts Pre-award Survey to consider responsibility of prospective contractor

Design of the Accounting System is part of the Preaward

Survey (SF 1408 Criteria) Link: https://www.dcaa.mil/Checklists-Tools/Pre-award-Accounting-System-Adequacy-Checklist/

DCAA is requested to evaluate design of Accounting System and report back to Contracting Office or DCMA https://www.dcaa.mil/Checklists-Tools/Pre-award-Accounting-System-Adequacy-Checklist/

Contractor Qualifications

Responsible Prospective Contractor Criteria:

Adequate financial resources to perform the contract

Ability to comply with the required or proposed delivery or performance schedule, considering the firm’s existing commercial and governmental business commitments

A satisfactory performance record

A satisfactory record of integrity or business ethics

The necessary organization, experience, accounting, operational controls, and technical skills to perform the contract

The necessary production, construction and technical equipment and facilities

Eligibility to receive the award under applicable laws and regulations

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Pre-award Audit Objectives

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Evaluates design of Accounting System to determine if it is acceptable for prospective contract

Contractor should be prepared to demonstrate how accounting system design satisfies SF 1408 during audit fieldwork stage

DCAA Pre-Award Accounting System Audit Program:

https://www.dcaa.mil/Portals/88/Documents/Guidance/Dire ctory%20of%20Audit%20Programs/17740%20Preaward% 20Survey%20of%20Prospective%20Contractor%20Accoun ting%20System%20AP.pdf?ver=w0ujMZRuYOzWedf4w7EY Vg%3d%3d https://www.dcaa.mil/Portals/88/Documents/Guidance/Directory%20of%20Audit%20Programs/17740%20Preaward%20Survey%20of%20Prospective%20Contractor%20Accounting%20System%20AP.pdf?ver=w0ujMZRuYOzWedf4w7EYVg%3d%3d https://www.dcaa.mil/Portals/88/Documents/Guidance/Directory%20of%20Audit%20Programs/17740%20Preaward%20Survey%20of%20Prospective%20Contractor%20Accounting%20System%20AP.pdf?ver=w0ujMZRuYOzWedf4w7EYVg%3d%3d https://www.dcaa.mil/Portals/88/Documents/Guidance/Directory%20of%20Audit%20Programs/17740%20Preaward%20Survey%20of%20Prospective%20Contractor%20Accounting%20System%20AP.pdf?ver=w0ujMZRuYOzWedf4w7EYVg%3d%3d https://www.dcaa.mil/Portals/88/Documents/Guidance/Directory%20of%20Audit%20Programs/17740%20Preaward%20Survey%20of%20Prospective%20Contractor%20Accounting%20System%20AP.pdf?ver=w0ujMZRuYOzWedf4w7EYVg%3d%3d https://www.dcaa.mil/Portals/88/Documents/Guidance/Directory%20of%20Audit%20Programs/17740%20Preaward%20Survey%20of%20Prospective%20Contractor%20Accounting%20System%20AP.pdf?ver=w0ujMZRuYOzWedf4w7EYVg%3d%3d

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Standard Form 1408 Criteria

../Proforma and Examples/Standard Form 1408 - Pre-Award Survey of Prospective Contractor (Accounting System).pdf

Acceptable Accounting System

DFARS 252.242-7006(a)(1):

“a system that complies with the system criteria in paragraph

(c) of this clause to provide reasonable assurance that—

(i) Applicable laws and regulations are complied with;

(ii) The accounting system and cost data are reliable;

(iii)Risk of misallocations and mischarges are minimized; and

(iv)Contract allocations and charges are consistent with billing procedures.”

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Defining an Accounting System

DFARS 252.242-7006(a)(2):

“the Contractor’s system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions”

May include subsystems for specific areas such as:

Billing

Labor

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Total Contract Costs

The total cost of a contract is the sum of the direct and indirect costs allocable to the contract.

While the total cost of a contract includes all costs properly allocable to the contract, the allowable costs to the Government are limited to those allocable costs which are allowable pursuant to Part 31 and applicable agency supplements.

Direct Versus Indirect Costs

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DFARS 252.242-7006(c)(2) requires proper segregation of direct costs from indirect costs.

Direct Cost is any cost that is identified specifically with a particular final cost objective.

Indirect cost means any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective

Defining Costs

DFARS 252.242-7006(c)(3) requires identification and accumulation of direct costs by contract.

DFARS 252.242-7006(c)(4) requires a logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives.

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Direct Cost

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Direct costs are not limited to items that are incorporated in the end product as material or labor.

No final cost objective shall have allocated to it as a direct cost any cost that has been included in an indirect cost pool.

Direct costs of the contract shall be charged directly to the contract.

Definition of an Indirect Cost

Identified with two or more final cost objectives or an intermediate cost objective.

An indirect cost is not to be allocated to a final cost objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of any other final cost objective.

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Indirect Cost Overview

The number of indirect cost accounts in a single company can range from one to hundreds.

The indirect structure needs to be tailored to your company and how it operates.

In general, indirect cost accounts fall into two broad categories:

Overhead

General and Administrative (G&A)

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Overhead Pools

Cost related to support of specific operations

Examples of indirect cost rates include:

Material Overhead

Manufacturing Overhead

Engineering Overhead

Site Overhead

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General and Administrative These are management, financial, and other expenses related to the general management and administration of the business unit as a whole. To be considered a G&A expense of a business unit, the expenditure must be incurred by, or allocated to, the general business unit.

Examples of G&A expenses include:

Salary and other costs of the executive staff of the corporate or home office

Salary and other costs of such staff services as legal, accounting, public relations, and financial offices

Selling and marketing expenses

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Allocation Base Overview

Indirect costs should be allocated based on benefits accrued to intermediate and final cost objectives.

Allocation base must be reasonable.

There must be a relationship between the selected allocation base and the pool costs.

For example, training costs in the overhead pool are not necessarily caused by a particular cost objective, but the cost objectives might benefit from the training of employees. In that case, training would be related and benefit the labor dollars incurred on contracts/final cost objective.

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Allocation Base Examples In general, typical allocation bases for Overhead and G&A are:

Overhead

Direct Labor Dollars

Direct Labor Hours

Direct Material Dollars

G&A

Total Cost Input (Total direct and indirect costs minus G&A)

Value Added (Total Cost Input less subcontracts and direct materials)

Single Cost Element (e.g. Direct labor dollars)

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Allowability

FAR 31.201-2

A cost is allowable only when the cost complies with all of the following requirements:

Reasonableness

Allocability

Terms of the contract

Applicable Cost Accounting Standards (CAS)

Any Limitations Set forth in the entire Subpart 31.2

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Reasonableness

FAR 31.201-3

FAR considers a cost to be reasonable if:

In its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business.

It is the contractor's responsibility to establish that each cost is reasonable.

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Allocability

FAR 31.201-4

A cost is allocable to a government contract if it:

Is incurred specifically for the contract;

Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or

Is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.

Contract Terms

Specific types of cost are often addressed in a contract or request for proposal (RFP).

However, the contract terms can only be more restrictive than the other factors that must be considered in determining cost allowability, not less. In other words, the contract terms cannot allow a cost that is:

Unreasonable

Improperly measured, assigned and allocated to the contract

Unallowable in accordance with specific cost principles

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Accounting for Contract Costs

The accounting system must be able to accumulate and report the costs for each final cost objective; i.e., government contract.

Direct costs of the contract, plus

Allocation of applicable indirect costs, less

Unallowable Costs

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DFARS Accounting Requirements

DFARS 252.242-7006(c) requirements:

(5) Accumulation of costs under general ledger control

(6) Reconciliation of subsidiary cost ledgers and cost objectives to general ledger

(7) Approval and documentation of adjusting entries

(11) Interim (at least monthly) determination of costs charged to a contract through routine posting of books of accounts

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Labor System

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DFARS 252.242-7006(c) requirements:

(9) A timekeeping system that identifies employees’ labor by intermediate or final cost objectives

(10) A labor distribution system that charges direct and indirect labor to the appropriate cost objectives

Timekeeping

Labor should be charged to intermediate and final cost objectives based on a timekeeping document (paper or electronic timecards) completed and certified by the employees and approved by the employees’ supervisors.

Employees should fill out timesheet on a daily basis and include all hours worked including uncompensated overtime.

Labor cost distribution records should reconcile to payroll records and labor distribution records should trace to and from the job cost ledger and general ledger accounts.

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Unallowable Costs

DFARS 252.242-7006(c)(12) requires “Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions”

Therefore, contractors need written policies and procedures to identify and exclude unallowable costs.

Unallowable costs need to be identified and excluded from any billings, claims, and proposals applicable to a

Government contract.

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Costs by Contract Line Item

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DFARS 252.242-7006(c)(13) requires “Identification of costs by contract line item and by units (as if each unit or line item were a separate contract), if required by the contract”

Therefore, the accounting system needs to be able to expand beyond a project number.

Each job needs to be expanded to the requisite level of detail as determined by contract terms.

Make sure the contract is adequately briefed to determine what this level might be.

Invoicing Requirements

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DFARS 252.242-7006(c) requirements:

(16) Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms

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Overview of Invoicing Contractors should only bill cost which comply with FAR 52.216-7

Recorded costs that have been paid by cash, check, or other form of actual payment for items or services purchased directly for the contract

When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid, for supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made:

In accordance with the terms and conditions of a subcontract or invoice; and

Ordinarily within 30 days of the submission of the Contractor’s payment request to the Government

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Billings need to be based on current contract provisions.

The total amount billed should not exceed any contract, work order, funding limitation, or any other contract ceiling amount.

Important to brief contract to identify billing provisions, including but not limited to:

Restriction of billing frequency

Special withholding provisions

Contractual unallowable costs

A contractor needs to reconcile booked costs to billed costs.

Basis of Invoiced Costs

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Cost Accounting Information

DFARS 252.242-7006(c)(15) requires “Cost accounting information, as required—

(i) By contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR 52.232-22), or allowable cost and payment (FAR 52.216-7); and

(ii) To readily calculate indirect cost rates from the books of accounts”

Interim rates should be routinely monitored.

At least monthly, an employee needs to be responsible for monitoring total contract expenditure against contract limitations on price or cost.

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DFARS Cost Accounting

Requirements

DFARS 252.242-7006(c) requires:

(17) Adequate, reliable data for use in pricing follow-on acquisitions; and

(18) Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.

Management Reviews/Internal

Audits

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DFARS 252.242-7006(c) requires:

(8) Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices

Common Areas of Noncompliance

Contractors not making Interim (at least monthly) determination of costs charged through routine posting to books of account

Failure to properly segregate direct and indirect costs

Improper timekeeping

Failure to exclude unallowable costs

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Areas of Noncompliance

Inadequate procedures to ensure that subcontractor and vendor costs are only included in billings if payment to subcontractor or vendor will be made in accordance with terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor’s payment request to the Government.

Frequently Asked Questions o How do I get a DCAA approved government accounting system?

You cannot. There is no such thing as a DCAA approved government accounting system.

o How do I request a DCAA audit of my accounting system?

DCAA does not perform audits requested by a contractor.

DCAA only performs these audits based on a request from a federal entity who is responsible for determining the acceptability of a contractor’s system.

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FAQs Continued

Is QuickBooks or any other accounting software applications acceptable accounting system for federal contracting?

An accounting system is more than just a software package. It includes accounting methods, procedures, and controls. Many accounting software application can be part of an acceptable accounting system or set up in a manner that fails to meet the requirements of an acceptable system.

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DCAA Internet Resources Guidance

Audit Process Overview – Information for Contractors Manual

Directory of Audit Programs

Contract Audit Manual

Select Area of Cost Guidebook (FAR 31.205 Cost Principles)

Links to Acquisition Regulations

Checklists and Tools

Cost of Money Rates

Incurred Cost Electronically (ICE) Model

Contractor Submission Portal

Adequacy Checklists - Preaward Accounting System, Contract Pricing

Proposal, Forward Pricing Rate Proposal, Incurred Cost Submission, Termination Settlement Proposal.

Frequently Asked Questions For Contracting Officers, Contractors and

COVID-19

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Questions/Comments

Katelyn Rigle

Financial Liaison Advisor- Small Business Coordinator Headquarters – Operations Audit Liaison Division

8725 John J. Kingman Road

Fort Belvoir, VA 22060

VoIP: (571) 448-6376

E-mail: katelyn.a.rigle.civ@mail.mil