SBIR & STTR Accounting for DoD Contracts – An Overview of the Different Types of DCAA Audits

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Once you´ve received notification that your company is being considered for a Department of Defense (DoD) Phase II SBIR/STTR award or other cost-type government contract you should understand the frequency and purpose of the audits that you´ll be subject to until the administrative closeout of your contract. The Defense Contract Audit Agency (DCAA) has audit responsibility for all DoD contracts.

Recent changes

On September 23, 2009 the U.S Government Accountability Office (GAO) reported widespread problems with DCAA´s audit quality requiring significant reform. GAO found "DCAA's management environment and quality assurance structure were based on a production-oriented mission that put DCAA in the role of facilitating DOD contracting without also protecting the public interest." As a result of the GAO´s report, we have seen a sea-change in DCAA´s attitude when representing our clients during their audits due to new initiatives being taken by DCAA.

For overview purposes, the following is a summary of the different types of DCAA audits:

1. Pre award survey – This review isn´t even referred to as an "audit" as it is a superficial review to ensure that your accounting system is "acceptable" and whether you have the financial ability to finance approximately sixty to ninety days of working capital float.

2. Indirect rate projection audit – A review of the underlying projections used in establishing your provisional billing (and bidding) rates. It is important to note that DCAA places much greater emphasis on prior actual results than on Excel spreadsheet projections!

3. Progress payment audit – The DCAA judgmentally selects an invoice that you submit and traces all direct costs back to their originating source documents (timesheets, vendor invoices, expense reports, etc.).

4. Floor check – This is usually a surprise! DCAA will visit your facility and randomly select your employees for audit to ensure that they are following the government´s strict timekeeping rules. Employees must be ready to properly answer questions on timekeeping procedures and must be able to demonstrate that their timesheets reflect those procedures.

5. Financial capacity audit – In this audit, DCAA performs extensive balance sheet analysis of your organization to determine it´s underlying financial solvency in order to determine know how much work your organization has the ability to perform.

6. Annual Incurred Cost Audit – With a Phase 2 SBIR, your contract inevitably contains Federal Acquisition Regulation (FAR) clause 52.216-7 - The Allowable Cost Clause. This clause requires you to submit an annual "true up" report known as an Incurred Cost Submission 180 days after your fiscal year end. This submission has a 100% chance of being audited by DCAA and is their main event! This audit is where you´ll discover whether your accountants knew what they were doing, or not – a year or two after the fact. When the annual incurred cost audit has been completed, you will be asked to sign off on a final indirect rate agreement for that year. Additionally, you will be required to file all final administrative reports for each contract.

7. Contract close out – While not technically an audit, you should understand that until the contracting officer formally closes your contract that your organization continues to be subject to the terms and conditions of the award.

Our CPA firm has helped our clients navigate DCAA audits since 1977. Our services are designed to ensure that your accounting systems and internal controls are working properly in order to produce accounting records that are always "audit ready" to ensure surprise-free audits.

In closing, as a way to introduce our firm´s unique services, we are happy to provide a complimentary accounting system review to let you know how you would fare if your accounting system is audited by DCAA.

For more information this or related topics, or to take us up on any of our free offers, please visit www.jamesoncpa.com.

Edward G. Jameson, CPA

www.jamesoncpa.com