What to Expect from DCAA Audits and Hot Topics for 2024

Navigating the landscape of government contracting can be challenging, especially when it comes to understanding the intricacies of Defense Contract Audit Agency (DCAA) audits. As a government contractor, it’s crucial to be well-prepared for these audits to ensure compliance and maintain your eligibility for future contracts. This comprehensive guide will help you understand what to expect from DCAA audits and highlight some hot topics for 2024.

Pre-Award Survey of Prospective Contractor (SF 1408)

Before awarding a contract, the DCAA conducts a Pre-Award Survey of Prospective Contractor Accounting System using the Standard Form (SF) 1408. This survey is not an audit but rather an examination to assess if a contractor’s accounting system can accurately track costs and comply with government standards.

Key Areas Evaluated

  1. Accrual Basis of Accounting: Ensuring that revenues and expenses are recorded when they are incurred, not when the cash is received or paid.
  2. Cost Segregation: Differentiating between direct and indirect costs and ensuring proper allocation.
  3. Indirect Cost Allocation: Allocating indirect costs such as overhead and general administrative expenses accurately.
  4. Timekeeping: Keeping meticulous records of time worked on various projects, which is critical for labor cost allocation.
  5. Project Accounting: Tracking costs specific to each project to ensure proper billing and compliance.
  6. Accounting System Review: Evaluating the overall accounting system’s capability to handle government contract requirements.

While this was initially developed to target new contractors or those bidding on cost-reimbursable contracts for the first time, we are also seeing an increase in activity for seasoned companies that have consolidated through merger or acquisition. It is important to ensure that consolidated systems are designed and implemented using the criteria outlined in SF1408 to remain compliant. For small contractors bidding for the first time, the accounting system does not have to be fully operational at this stage, but it must demonstrate the potential to meet DCAA standards.

Post-Award Audits

Once a contract is awarded, the scope of DCAA audits expands to include extensive testing of transactions and processes. The goal is to ensure that the contractor adheres to the same areas evaluated during the pre-award survey but with actual transaction testing.

Key Focus Areas

  • Transaction Testing: Examining actual transactions to verify compliance with cost segregation, indirect cost allocation, and proper invoicing.
  • Process and Procedure Evaluation: Assessing the adequacy of written processes and procedures in conjunction with the accounting system.
  • Cost Build-Up and Expense Segregation: Ensuring that all costs are appropriately built up and segregated according to government standards.
  • Approval Validity: Once approved, the system remains valid for several years and can be used in future proposals.

ICE Submission and Subsequent Audit

The Incurred Cost Electronically (ICE) Submission and subsequent audit focus on verifying actual costs incurred and the rate build-up. This audit scrutinizes several critical areas:

Areas of Scrutiny

  • Cost Segregation and Allowability: Ensuring all costs are properly segregated and allowable under the Federal Acquisition Regulation (FAR).
  • Rate Build-Up: Verifying that the pool structure and incurred costs align with government requirements.
  • Expense and Labor Cost Testing: Conducting thorough tests of expenses and labor costs, including reconciliation between the general ledger and supporting documentation.
  • Labor Floor checks and Timesheet Reviews: Verifying accurate timekeeping practices and ensuring labor costs are appropriately recorded.
  • Executive Compensation and Bonuses: Assessing the reasonableness of executive compensation and bonuses within the limits set by government regulations.
  • Pool Structure Adequacy: Ensuring the pool structure used for indirect cost allocation is adequate and compliant.

Families First Coronavirus Response Act (FFCRA)

The Families First Coronavirus Response Act (FFCRA), extended through September 30, 2021, was a significant legislative measure providing paid sick leave and FMLA to employees. Employers received a credit on payroll taxes, which they could apply back to fringe (payroll tax expense).

Recommendations for Contractors

  • Contra-Account Treatment: It is advisable to treat the tax credit as a contra-account to maintain clarity in financial records.

Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) is a fully refundable tax credit for employers who faced shutdowns or significant declines in sales due to the pandemic.

Key Points

  • Qualified Wages: The credit is equal to a percentage of qualified wages.
  • Eligibility: Both full-time and part-time employees can be included.
  • Qualified Periods: Applicable for 2020 and the first three quarters of 2021.
  • Application Deadline: If missed, applications can still be submitted until April 15, 2025.

Executive Compensation

Executive compensation limits are tightly regulated across all government agencies.

Compensation Limits

  • 1/1/24 – 12/31/24: $646,000
  • 1/1/23 – 12/31/23: $619,000
  • 1/1/22 – 12/31/22: $589,000
  • 1/1/21 – 12/31/21: $568,000
  • 1/1/20 – 12/31/20: $555,000
  • 1/1/19 – 12/31/19: $540,000

Considerations

  • Company Size, Location, and Industry: Compensation limits vary based on these factors.
  • Hiring Ability: Companies should consider the available workforce and their ability to attract talent within these compensation limits.

Conclusion

Preparing for DCAA audits requires a deep understanding of the audit process and proactive management of key areas such as accounting systems, cost segregation, and timekeeping. Staying informed about hot topics like the FFCRA and ERC can provide additional benefits and ensure compliance with evolving regulations.

By focusing on these critical areas, government contractors can navigate DCAA audits more efficiently and maintain their eligibility for future contracts. As we progress in 2024, staying ahead of these requirements and understanding what to expect from DCAA audits will be essential for long-term success in government contracting.

For more insights and expert guidance on navigating DCAA audits, feel free to reach out to our team. We’re here to help you stay compliant and competitive in the ever-evolving landscape of government contracting.