DISCLAIMER: I am in no way promoting Quickbooks or other software in this post. I am only seeking to clarify some fundamental misconceptions about DCAA-compliant accounting systems.
I teach part-time in my spare time at a local community college. One of my classes is “Computerized Accounting” – basically it is a Quickbooks class. I thought it would be interesting to take a moment and mention that according to the publisher, Quickbooks is used by about 95% of small businesses (4 million users). I also live in the DC metro area – ripe with government contracts, contractors, and politics – so I have been compliant since I began my career as a DCAA auditor.
One of the things I heard a lot as was is [Accounting Software] DCAA compliant?
The simple answer is “No,” [Accounting Software] is not compliant by itself. In fairness, there is not a single accounting system software package out there that is compliant by itself (including QuickBooks, Deltek, SAP, GreatPlains, etc.), contrary to what sales people may have to say. Further, DCAA does not approve products or services of any kind. It only determines adequacy of a contractor’s accounting system as implemented and consistently applied.
There is much more to compliance than the software. First, the software system must be properly implemented with segregation of direct and indirect costs, proper pooling of indirect costs, proper and consistent job costing and proper accounting of unallowable costs to name a few (see also SF1408). Quickbooks and many other software packages CAN do this, but…
- In addition, the contractor must maintain adequate policies, procedures and internal controls such as timekeeping and labor reporting.
- And, the personnel that perform the accounting function must be properly trained in the policies/procedures and government contract accounting in general.
In order to make QuickBooks compliant, there are a number of enhancements that must be made, as follows:
- it must be set up to segregate direct from indirect costs.
- it must pool the indirect costs into homogenous indirect cost pools (the standard is the three rate system, fringe, overhead and G&A)
- develop the policies that are required to meet FAR and DCAA audit requirements.
At a minimum a small business contractor needs to maintain the following policies and procedures and apply them on a consistent basis. These include:
- Direct vs. indirect costing defining when a cost is direct and indirect
- Timekeeping and labor reporting consistent with DCAA requirements
- Indirect cost pools, allocation bases and indirect rate calculations
- Accounting for unallowable costs
- Project reporting consistent with the Limitations of Funds clause and invoicing clauses
- Invoicing especially invoicing under cost reimbursable contracts if applicable
- Purchasing, subcontracting, materials inventory if applicable
- Fixed asset capitalization and depreciation if applicable
The main short fall for Quickbooks is that it does not do a good job at electronic timekeeping for government contracts, it does not provide the necessary detail in its project reporting module and it does not calculate overhead rates. A contractor can overcome these short falls by implementing enhancements.
The enhancements could be completed manually, but a better solution is an automated solution. A contractor could create its own from scratch, but there are many such solutions available in the commercial market place. These solutions are intelligent templates that download QuickBooks data, calculate overhead rates and offer a variety of project reports acceptable to DCAA to fulfill the Limitations of Funds clause and other related clauses. Most offer a labor distribution tool as well.
Also contractors need to set up their systems to record transactions by person or labor category and make certain the project system reconciles to the general ledger each month. This is a matter of good set up and consistently following sound project accounting practices. Failure to meet this test is a failure for sure.
Making QuickBooks DCAA compliant is certainly a possibility with proper set up, internal controls and enhancements. It is such a widely used and relatively friendly starter system that it requires a second look at least – especially since the alternatives can be expensive. Enhancement tasks are not overwhelming. I do not recommend contractors attempt DCAA compliance alone. A trial and error approach can take time, become costly and result in numerous false starts. I highly recommend that a contractor get the advice and help of a qualified government contracts professional.