3 Essential Priorities for Government Contractor Accounting Compliance

Published by LTBD, P.C. | April 10, 2017

For most business owners, compliance is a term primarily associated with two things: the occupancy permits or business licenses they need to operate in their chosen place of business; and their annual tax filings with the IRS. However, for government contractors, compliance takes on a far greater significance: their core customer, the federal government, requires its own standards of compliance — and reserves the right to audit so it may ensure that compliance at any time.

Compliance in the accounting systems and practices of a government contractor is one of the core competencies that you need to achieve in order to protect and grow your business day in and day out. A non-compliant accounting system can result in losing contracts, being thrown off a prime contractor’s team, and even civil or criminal investigations that could, ultimately, put the business owners or officers behind bars. As a result, government contractor accounting compliance should clearly take on a top-of-the-list sense of urgency.

The most widely applied standard for government contractor accounting is the Defense Contract Audit Agency (DCAA) standard. The DCAA standard, while originally developed for use within the Department of Defense (DoD), has now expanded to become a recognized standard for a wide range of federal agency contracts, and is often referenced in the Federal Acquisition Regulations (FAR) themselves.

Looking at the DCAA requirements as the ‘gold standard’ for government contractor accounting compliance, three essential priorities become clear:

1. Time and labor are at the core of compliance.

The DCAA standards focus aggressively on time and labor tracking, which is especially apropos since most government contracting engagements are delivered through the professional services model. In fact, close to 75% of all DCAA requirements are focused on time and labor tracking.

As a result, the government requires that contractors establish clear and detailed standards for time and labor tracking in employment manuals, policy and procedure documents, workplace signs and through employee training.

It is also critical to understand that every employee in the company has to record day time entries, accurate project-level time allocations, and a clear record of both paid and unpaid time. This is true for every employee, whether or not they are assigned to a government contract.

The standards further require a detailed and precisely applied system for recording and classifying information, as well as a document process for submitting and approving time logs or time sheets, supported by a detailed audit trail. In addition, the time tracking system that your business uses must be able to demonstrate that time records cannot be tampered with or changed invisibly via edits at a later point in time.

2. Reporting is just half of the job. Management is the other half.

Many business executives become so accustomed to the processes and procedures associated with compliance reporting that they start to forget the purpose of the reports themselves. In the case of DCAA compliance, reporting is not the same as compliance. Compliance requires going beyond accurate tracking and delves deeply into effective management.

For example, DCAA standards expect that managers will be able to answer precise and detailed questions about their operations, such as:

  • What projects were/are individual personnel assigned to?
  • How long are individuals working on a given project?
  • What is the current status of time sheets (i.e. which have been submitted, which have been approved, and which are due but not submitted?)
  • How were approved times sheets reviewed, and against what standards were they evaluated and authorized?

Along with these questions and others like them, government contractors are also expected to carefully avoid problems associated with other issues, such as uncompensated overtime. For example, if salaried executive personnel work extensively on a contract — even if they’re not paid for every hour they work — that time needs to be tracked and reported accurately under the compliance standards.

3. You’ll either make it in evaluation…or you won’t.

In 2010, the DCAA changed its method of performing compliance reviews from a grading system to a pass-fail system. Under the old system, contractors could be identified as in need of improvement or correction in a handful of areas and still pass muster, so long as the effectively addressed the deficiencies identified.

That is no longer the case. And with the pass/fail standard, the DCAA is also no longer providing recommendations or feedback on issues that need to be addressed or which could use improvement. In other words, you have to be compliant across all areas in order to pass — and if you don’t pass, you’ll have to figure out the problems and resolve them yourself, without DCAA assistance or guidance.

A critical step you can take to prepare for compliance success is to evaluate your accounting system against the three most common contract types. These include fixed price, cost-reimbursable and time+materials. Keep in mind that it’s essential for you to select and configure accounting software and a time tracking application that can meet the requirements of these standards.

By focusing on these three essential priorities, your government contracting business will be well-positioned to achieve and maintain compliance while also enhancing the accuracy and timeliness of management accounting information and reports you can use to improve the growth and profitability of your business.

Learn more about how an outsourced accounting partner can help you achieve and maintain government contractor accounting compliance as you grow your business.

Image Credit: PEO ACWA (Flickr @ Creative Commons)
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