What You Need to Know About DCAA and FAR Compliance

DCAA stands for Defense Contract Audit Agency, while FAR stands for Federal Acquisition Regulation. Both DCAA and FAR are critical components of government contracting, and compliance with them is necessary for companies that want to do business with the U.S. government.

Here are some important things you need to know about DCAA and FAR compliance:

What is DCAA Compliance?
The DCAA is responsible for auditing and evaluating government contracts and ensuring that contractors are following regulations and guidelines. To be DCAA compliant, contractors must adhere to certain accounting principles, maintain accurate and complete records, and follow proper billing procedures.

FAR Compliance
The FAR is a set of rules and guidelines that govern the acquisition process for federal agencies. The regulations cover a wide range of topics, including procurement procedures, contract administration, and ethics. Contractors must comply with the FAR to be eligible for government contracts.

DCAA Audits
The DCAA conducts audits to ensure that contractors are in compliance with government regulations. Audits can be performed on a variety of areas, including billing procedures, cost accounting, and timekeeping. Contractors should maintain accurate records and be prepared to provide documentation to support their compliance.

Compliance Requirements
Contractors must be aware of the compliance requirements for both DCAA and FAR. This includes understanding the rules and regulation, maintaining accurate records, and implementing appropriate internal controls. Failure to comply with these requirements can result in penalties, loss of contracts, and damage to a company’s reputation.

Importance of Compliance
Compliance with DCAA and FAR regulations is critical for companies that want to do business with the government. It not only ensures that contractors are following proper procedures and guidelines, but it also helps to promote transparency and accountability in government contracting.

In summary, DCAA and FAR compliance are important for companies that want to do business with the government. Contractors must be aware of the rules and regulations, maintain accurate records, and implement appropriate internal controls to ensure compliance. Failure to comply with these requirements can result in penalties, loss of contracts, and damage to a company’s reputation.

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Who Needs an Incurred Cost Submission?

It is a few weeks into the new year, and you finally feel like you can breathe again. Your business’ financial statements are done, and your taxes are in progress. For the foreseeable future, it seems as though everything will be smooth sailing. That is until you get a reminder about an Incurred Cost Submission (ICS). Before the panic can set in, you remember that not every government contractor needs to submit an ICS. But how do you know whether you need to submit an Incurred Cost Submission?

Who Needs to submit an Incurred Cost Submission?

Government contractors with time and materials (T&M) or cost reimbursement contracts need to submit an incurred cost submission. Contracts that require the submission of an ICS will include the Federal Acquisition Regulation (FAR) clause 52.216-7. This clause requires the submission of an ICS six months after the fiscal year end. FAR 16.307 requires the inclusion of this clause in T&M and cost reimbursement contracts. If a contractor needs to submit an ICS late, an extension request to their contracting officer (CO) needs to occur. Also, an ICS must meet DCAA’s requirements, and their adequacy review.

Why does an Incurred Cost Submission need to be submitted?

Provisional billing rates (PBR) provide contractors with indirect cost rates to bill the government on T&M and cost reimbursement contracts. The PBRs are approximate rates of a contractor’s final rates. Since, PBRs are only estimates, they often differ from the final rate. The differing rates is why contractors must submit an incurred cost submission. An ICS establishes the final actual indirect cost rates. With the final rates, any under or over payments to the government becomes clear. Ultimately, the ICS provides a ‘true up’ of actual indirect costs to those billed using the PBR rates.

DCAA requires contractors with T&M and cost reimbursement contracts to submit an incurred cost submission. If you are unsure whether you need to submit an ICS, our team is here to help!

Originally written by Jamie M. Shryock, CPA

Updated and additional content provided by Elizabeth Partlow

Common Problems for the Incurred Cost Submission

The Federal Acquisition Regulations (FAR) requires government contractors with certain contracts to submit an incurred cost submission (ICS). FAR 52.216-7 requires contractors who have time and material (T&M) or cost-reimbursable contracts to submit an ICS. The ICS schedules reconcile a contractor’s billings with the government. It does this by calculating the final indirect cost rates contractors incur. Government contractors have six months to submit an ICS after their fiscal year is over.

An ICS can be an overwhelming task to complete. The ICS model includes several schedules. Each of these schedules takes time, and usually many documents to complete. With at least fifteen schedules to complete, common problems may happen.

Job Cost Errors

As a government contractor, it is important to classify costs correctly. Therefore, classifying costs as direct, fringe, overhead, general & administrative, and unallowable is necessary. The proper classification minimizes the reporting errors of costs on the ICS schedules.

Segregating costs, such as allowable and unallowable costs, also prevents government contractors from incurring any penalties. The FAR clause 52.242-3 describes how contractors may face penalties as a result of including unallowable costs in their indirect cost pools.

Similarly, the job cost ledger not reconciling with the general ledger is another common problem for the ICS. Examples of why the two ledgers do not reconcile are:

• Not assigning direct costs to a job
• Assigning direct costs to a customer, not to a specific job
• Tagging indirect costs to a job

Invoice Errors

It is important to make sure invoicing for government contracts is done correctly. However, there are different requirements for each type of contract. Some contracts include restrictions or limits on the invoicing for certain costs. On the other hand, other contracts may require to invoice at negotiated rates. Common errors that occur during the invoicing process are:

• T&M contracts are not billed at negotiated rates
• T&M contracts are billed with labor rates and hours as lump sums
• Cost reimbursable contracts are billed like a T&M project.

In addition, over or under billings may exist on Schedule I as a result of job costs or invoicing errors. Due to this, the government contractor may owe the government money, or vice versa.

In conclusion, completing an incurred cost submission is necessary if government contractors have cost reimbursable or T&M contracts. Your virtual CFO should be proactive during the year to help minimize errors when completing an ICS. Ultimately, working having a virtual CFO who specializes in government contracting is the best.

Originally written by Jamie M. Shryock, CPA 

Updated and additional content provided by Elizabeth Partlow