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43 Steps to Maintain a DCAA Compliant Accounting System

Staying FAR-compliant is pivotal to your government award. This in-depth guide details what needs to be done and by whom, while providing actionable steps and explanations.
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43 Steps to Maintain a DCAA Compliant Accounting System

A government grant or contract brings non-dilutive funding for your innovation. But please understand, federal funding is never free money; it comes with strings attached.

DO YOU HAVE A COST-REIMBURSABLE AWARD?

  • The following are typically cost-reimbursable-type awards:
    • NIH and DOE SBIR/STTR Phase I and II awards
    • Most DOD SBIR/STTR Phase II awards
    • ARPA-E and EERE awards from the DOE
    • R01, U01 and BARDA awards
    • Most IDIQ, BAA and Army Medical Research Office awards from the DOD

COST-REIMBURSABLE AWARDS REQUIRE COMPLIANCE WITH FAR PART 31. 

If you have a cost-reimbursable award, you must comply with the Federal Acquisition Regulation (FAR) Part 31, as well as any supplemental regulations from your funding agency. 

  • Step 1. You must set up a FAR Part 31 compliant accounting system. This system must be capable of: 
    • Segregating costs as direct, indirect or unallowable; 
    • Producing job costs reports that display direct costs by category, as well as proportionally allocated indirect costs; and 
    • Producing actual indirect cost rate reports. 
  • Step 2. You must maintain this system vigilantly. 

 

KEY

To address the basic accounting procedures listed below, you will need different levels of ability and expertise. We’ve color-coded each task to make this easy to identify.

Important: There are several different types of CPAs. There is a significant difference between a tax CPA, an audit CPA, and a FAR Part 31 government award specialist CPA. 

JAM Illustration NIH Grant

 

ONGOING CASH MANAGEMENT 

WHY: Cash is king. It is essential to manage cash properly on a day-by-day basis. Doing so ensures that you can meet payroll and other obligations as they arise, adhere to agency rules with regards to advance draws and reimbursements, and pay vendors in a timely manner to maintain good working relationships. 

WHY IT MATTERS IN AN AUDIT: Your disbursement source documents will be tested for proper vouching and approval. Cash draws will be tested for required support and adherence to agency rules. Noncompliance equates to an audit finding, which could trigger a notification to the Inspector General, a cut in your negotiated rate, repatriation of funds and a hold on pending awards. 

WHY IT MATTERS TO YOUR BUSINESS: Proper cash management helps establish a good reputation —and better terms— with vendors, builds credit, minimizes stress, and improves overall morale. 

WHAT CAN HAPPEN IF IT GOES SOUTH: Vendors could require you to pay bills in advance. The government could restrict access to funds or suspend payment of invoices until the problem is remedied. You may have to assume business or personal debt, lay off staff, or even close up shop. 

JAM Illustration Ongoing Cash Mgmt

 

 

 

CREDIT CARD MANAGEMENT

WHY: Credit cards give you a 30-day window to pay, and a concise way to enter and vouch for expenses. However, failure to process credit card payments to your credit card company can result in interest expenses, and interest expenses are not allowable. 

WHY IT MATTERS IN AN AUDIT: Disbursement source documents will be tested for proper vouching and approval. Again, noncompliance equates to an audit finding, a notification to the Inspector General, a cut in your negotiated rate, repatriation of funds and a hold on pending awards.

WHY IT MATTERS TO YOUR BUSINESS: Proper credit card management gives you some breathing room on cash and helps build credit. It’s important to establish and enforce procedures to get charges coded as quickly as possible in your accounting system. Failure to code and bill your clients for project expenses can create cash flow problems.

WHAT CAN HAPPEN IF IT GOES SOUTH:  A poor credit rating and all that comes with it.

 

JAM Illustration Creditcard Mgmt

TIMECARD AND EMPLOYEE RESOURCE PLANNING AND MANAGEMENT

WHY: Your employees typically are your greatest cost and the way they fill out their timecard will massively influence your indirect cost rate.

WHY IT MATTERS IN AN AUDIT: Your employees’ time must be accounted for accurately. Auditors need assurance that employees worked the number of hours stated on their timesheet and that accounting system controls are in place to ensure that these costs are not tampered with. 

WHY IT MATTERS TO YOUR BUSINESS: Timesheets are the mechanism used to allocate payroll costs between direct and indirect cost categories.  Auditors are keenly aware that if you’ve done a poor job of projecting your indirect cost rate, there is a heightened risk that you will commit (timesheet) fraud to avoid the devastating cash flow problems that will result from your mistake. 

WHAT CAN HAPPEN IF IT GOES SOUTH: If you do this the wrong way and have a disgruntled employee who becomes a whistleblower, you can lose your award, face jail time, and be forced to repatriate government funds. 

JAM Illustration Timecard Employee Resources

 

CUTOFF

WHY: The cutoff date determines when transactions are to be recorded. For instance, December 31 is typically the cutoff date for all transactions that will be recorded for that fiscal year. 

WHY: Helps insures the integrity of your accounting process and that your books are kept in accordance with GAAP, which is a requirement.  Expenses need to be recorded in the period in which they occur.

WHY IT MATTERS IN AN AUDIT: If expenses and revenue are not properly recognized, it may result in expensive audit findings.

WHY IT MATTERS TO YOUR BUSINESS: If expenses and revenue are not recorded in the correct period, your award’s direct and indirect expenses will not be accurate, which means your agency financial reports will not be accurate and you have either overbilled or underbilled the government.

WHAT CAN HAPPEN IF IT GOES SOUTH: Did we mention expensive audit findings?

 

JAM Illustration Cutoff

OTHER ASSETS & ACCRUED EXPENSES

WHY: Your books are required to be kept in accordance with GAAP.

WHY IT MATTERS IN AN AUDIT: Your expenses may be understated or overstated leading to a miscalculation of both your award spending and indirect rate(s). This, in turn, can lead to expensive audit findings.

WHY IT MATTERS TO YOUR BUSINESS: If your expenses and revenue are not recorded in the correct period, your direct and indirect expenses, and agency financial reports will not be accurate. This may result in over or under billing the government.

WHAT CAN HAPPEN IF IT GOES SOUTH: You think you have money to spend when in reality you don’t, you overspend, or you don’t take all the money to which you are entitled. 

 

JAM Illustration Accrued Expenses

DEBT (IF APPLICABLE)

WHY: Debt is a company obligation, associated interest and carrying costs are unallowable and must be accounted for separately from government funding.

WHY IT MATTERS IN AN AUDIT: Costs associated with debt are unallowable. Using government funds to repay borrowing, or to pay interest or fees associated with debt equates to an audit finding.

WHY IT MATTERS TO YOUR BUSINESS: Interest expense is a specifically unallowable expense.

WHAT CAN HAPPEN IF IT GOES SOUTH: There is a 100% penalty for trying to charge the government for an unallowable expense (as well as the cost disallowance).

 

JAM Illustration Debt

EQUITY

WHY: Government awards often have restrictions on company ownership.

WHY IT MATTERS IN AN AUDIT: If the company has owners not allowed by the award, this could be an audit
finding. Likewise, legal fees incurred for the transfer of ownership (i.e. Series A offering) are an unallowable cost as the government derives no benefit from the change in ownership. Using government money to pay for
unallowable costs could be an audit finding. 

WHY IT MATTERS TO YOUR BUSINESS: If your ownership is not in compliance, you will not be eligible
for certain government awards.

WHAT CAN HAPPEN IF IT GOES SOUTH: You can lose your government funding or your investors.

 

JAM Illustration Equity

CONTRACT AND GRANT MANAGEMENT

WHY: Federal Acquisition Regulation and agency compliance requires government grant and contract expertise to pass government audits, your company must demonstrate that you maintain a FAR-compliant accounting system.

WHY IT MATTERS IN AN AUDIT: If your accounting system doesn’t report spending properly, it’s an audit finding. If you spend outside the period of performance, it’s an audit finding.  And if all the proper financial reports haven’t been filed, it’s an audit finding.

WHY IT MATTERS TO YOUR BUSINESS: If you can’t demonstrate a compliant accounting system, you may lose awards, have funding restricted, owe money as a result of audits and be forced to repatriate overbillings.

WHAT CAN HAPPEN IF IT GOES SOUTH: Disgruntled employees get 15-30% of all funds recovered by the federal government under the federal whistleblower’s act.  If you don’t do this right, you could be subject to criminal, civil, or administrative penalties.

 

JAM Illustration Contract Grant Mgmt

INDIRECT RATE MONITORING

WHY: You must true up with the government at year-end. You don’t want to leave any money on the table, but you don’t want to have to return any money, either.

WHY IT MATTERS IN AN AUDIT: Expense variances from year-to-year could indicate problems in processes and controls. Not truing up the rates at year-end is an audit finding and may result in a repatriation of funding.

WHY IT MATTERS TO YOUR BUSINESS: You may not be proposing the correct indirect rate for future awards, so you may leave yourself scrambling to find outside money to fund your indirect expenses.

WHAT CAN HAPPEN IF IT GOES SOUTH:  You don’t have enough funding, so you may wind up borrowing money you could have been given if you knew how to ask for it properly.  As a result, you may prematurely dilute yourself, or become insolvent.  Without proper funding, your business will not self-actualize. 

 

JAM Illustration Indirect Rate Monitoring

REVENUE RECOGNITION – TRACKING CUSTOMER ADVANCES & UNBILLED RECEIVABLES

WHY: You need to properly account for money you have earned in accordance with the FAR and agency supplements and track this against money you have received.

WHY IT MATTERS IN AN AUDIT: You must be able to provide proper supporting documentation for expenses reimbursed by the government agency, otherwise, you will have an audit finding and the the Inspector General will be notified.

WHY IT MATTERS TO YOUR BUSINESS: You want to get paid!

WHAT CAN HAPPEN IF IT GOES SOUTH: You will have no money.  

 

JAM Illustration Revenue Recognition

GET THE HELP YOU NEED. 

WHO: Contact the government award accounting specialists at Jameson & Company.

WHY: We are experts in government award accounting, offer an innovative FAR-compliant accounting system
(JamesonWorx), and have multiple service levels to fit your specific needs.

WHY IT MATTERS IN AN AUDIT: After 30 years, we know every agency, all the pitfalls and how to avoid them.
With over $4 billion in awards managed, we are experts at protecting our clients, whether we’re negotiating an indirect cost rate or representing them during an audit.

WHY IT MATTERS TO YOUR BUSINESS: Handling your government award accounting properly helps you keep your current award, focus on your research and business, and qualify for additional funding.

WHAT CAN HAPPEN IF IT GOES SOUTH: Our job is to make sure that doesn’t happen.  

 

 

JAM Illustration Govt Compliance

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Ed Jameson
Ed Jameson, CPA, Managing Partner

I’ve been in practice for over 40 years helping our small business clients procure, manage, and survive audits on more than $6 billion in federal government contract and grant funding. We’ve been featured presenters and panel moderators at Tech Connect’s National SBIR/STTR conferences since 2010, and I’ve presented at the DOD’s Mentor Protégé Summit and present regularly for several state and local organizations.

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