Complete checklist for passing Defense Contract Audit Agency (DCAA) accounting system audits. Ensure your accounting system meets DCAA requirements before your first audit.
DCAA Accounting System Requirements
Defense contractors must maintain DCAA-compliant accounting systems to receive and manage cost-reimbursable contracts. Use this checklist to verify your system meets all requirements:
1. Timekeeping System
| Requirement | Description | Status |
|---|---|---|
| Daily Time Recording | Employees must record time daily, not weekly or monthly | ☐ |
| Contemporary Recording | Time recorded at or near the time work is performed (same day or next day) | ☐ |
| Supervisor Approval | Timesheets approved by supervisor with signature/electronic approval | ☐ |
| Direct vs. Indirect | Clear segregation of direct (contract) and indirect (overhead) time | ☐ |
| Job Charging | Time charged to specific contracts, task orders, or indirect pools | ☐ |
| After-the-Fact Changes | Changes to approved timesheets documented with reason and approval | ☐ |
| Unallowable Time | System identifies and segregates unallowable costs (lobbying, entertainment, etc.) | ☐ |
2. Job Cost Accounting
| Requirement | Description | Status |
|---|---|---|
| Contract Segregation | Costs accumulated separately for each contract | ☐ |
| CLIN/Task Order Detail | Ability to track costs at CLIN or task order level | ☐ |
| Material Costs | Materials charged to contracts when purchased or issued from inventory | ☐ |
| Subcontractor Costs | Subcontractor invoices charged to appropriate contracts | ☐ |
| Other Direct Costs (ODCs) | Travel, consultants, special equipment tracked by contract | ☐ |
| Audit Trail | Supporting documentation (receipts, invoices, timesheets) retained and traceable | ☐ |
3. Indirect Rate Structure
| Requirement | Description | Status |
|---|---|---|
| Proper Pooling | Indirect costs properly segregated into pools (Fringe, Overhead, G&A, etc.) | ☐ |
| Logical Allocation Bases | Indirect pools allocated using logical bases (labor hours, direct costs, etc.) | ☐ |
| Consistent Application | Same accounting methods used consistently across all contracts | ☐ |
| Unallowable Costs Excluded | Unallowable costs identified and excluded from indirect rate calculations | ☐ |
| Forward Pricing Rates | Provisional billing rates established and applied to contracts | ☐ |
| Annual Rate Reconciliation | Actual indirect rates calculated annually and reconciled to provisional rates | ☐ |
4. General Ledger & Chart of Accounts
| Requirement | Description | Status |
|---|---|---|
| Adequate Detail | Chart of accounts provides sufficient detail for government audit purposes | ☐ |
| Direct/Indirect Segregation | Clear separation of direct costs, indirect costs, and unallowable costs in GL | ☐ |
| Reconciliation | Job cost ledger reconciles to general ledger monthly | ☐ |
| Financial Statements | Monthly financial statements prepared and reviewed | ☐ |
5. Unallowable Costs
FAR 31.205 defines unallowable costs. Your system must identify and exclude:
- Advertising and public relations (except recruiting)
- Alcoholic beverages
- Bad debts
- Contributions and donations
- Entertainment costs
- Fines and penalties
- Lobbying costs
- Organization costs (incorporation, partnership setup)
- Interest on borrowings
- Contingencies
- Goodwill amortization
6. Internal Controls
| Requirement | Description | Status |
|---|---|---|
| Written Policies | Documented accounting policies and procedures manual | ☐ |
| Segregation of Duties | Separation of authorization, recording, and custody functions | ☐ |
| Approval Authorities | Clear dollar limits and approval requirements for expenditures | ☐ |
| Reconciliations | Regular bank, AP, AR reconciliations performed | ☐ |
| Physical Inventory | Annual physical inventory count (if maintaining inventory) | ☐ |
Common DCAA Audit Deficiencies
Based on thousands of DCAA audits, these are the most common areas where contractors fail:
❌ Timekeeping Issues
- Weekly or monthly time recording (must be daily)
- Time recorded days/weeks after work performed
- Missing supervisor approvals
- Pencil whipping (copying previous week)
- No documentation for timesheet corrections
❌ Unallowable Costs
- Entertainment charged to overhead
- Interest expense not excluded
- Executive perks included in rates
- Political contributions not segregated
- Fines/penalties not excluded
❌ Indirect Rate Issues
- Improper allocation bases
- Inconsistent rate application
- Missing rate reconciliations
- No documentation for rate calculations
- Unallowable costs in indirect pools
Software Solutions for DCAA Compliance
Many contractors use specialized software to ensure DCAA compliance:
| Software | Best For | Approximate Cost |
|---|---|---|
| Deltek Costpoint | Large defense contractors (100+ employees) | $100K-500K+ implementation |
| Unanet | Mid-size contractors (20-500 employees) | $15K-75K annually |
| Jamis Prime | Small to mid-size contractors | $10K-50K annually |
| QuickBooks + Time Tracking Add-on | Very small contractors (<20 employees) | $2K-5K annually |
Important: Software alone doesn’t guarantee compliance. You still need proper processes, training, and internal controls.
DCAA Audit Process Timeline
Understanding the audit process helps you prepare:
- Notification (30+ days advance): DCAA sends audit announcement letter
- Entrance Conference: DCAA explains audit scope, requests documentation
- Fieldwork (2-12 weeks): DCAA reviews records, tests controls, interviews staff
- Draft Findings: DCAA presents preliminary findings to contractor
- Contractor Response (30 days): Address findings, provide additional documentation
- Final Report: DCAA issues final audit report (Adequate, Inadequate, or Qualified)
Possible Outcomes:
- Adequate: System meets DCAA standards. No issues.
- Inadequate: Significant deficiencies. Must fix before receiving cost-reimbursable contracts.
- Qualified: Some deficiencies but system is usable with conditions.
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Disclaimer: This checklist is for general guidance only. DCAA requirements may vary based on contract type and company size. Consult with a qualified government contracts accountant or consultant for specific guidance.
Last Updated: November 2025