DCAA Compliance: Accounting System Requirements for Cost-Plus Contracts

 Managing cost-plus contracts presents significant challenges. Every expense, labor hour, and indirect cost must comply with Defense Contract Audit Agency (DCAA) requirements. 

Even small mistakes, such as including unallowable costs in billable reports or skipping reconciliations can prompt auditors to question charges, issue findings, or delay payments, leading to financial risk and operational stress.

A well-organized accounting system helps the U.S.-based businesses stay in compliance, maintain clear audit trails, and simplify both pre- and post-award reviews. The following tips will help your system meet DCAA expectations and confidently prepare for any audit.

What is a DCAA-compliant accounting system?

An accounting system meets DCAA compliance when it provides transparent information to the government regarding the source of contract costs. It helps reviewers understand which contract costs are attributed, how those costs were recorded, and how they link back to actual transactions. This does not have an established certification process. The usual question is whether the system will demonstrate clear, consistent cost information when it is reviewed.

Reviewers typically focus on how the system operates in daily use. They expect costs to be recorded as work happens, not reconstructed later. They also look for records that can be followed step by step, without extra explanation. In this context, compliance reflects how clearly the accounting system shows contract costs, not the type of software being used.

The Accounting System Requirements for Cost-Plus Contracts

When it comes to cost-plus contracts, there has to be an accounting system that accurately tracks expenses and segregates unallowables. Thus, if your business conforms to the DCAA requirements and the Defense Federal Acquisition Regulation Supplement rules, then your company will definitely be in compliance.

Segregation of direct vs indirect costs

An important aspect of an accounting system that is DCAA compliant is maintaining direct and indirect costs in a traceable and explainable manner. While direct costs are assigned to a particular contract or cost objective, the assignments of indirect costs are made to cost pools and systematically assigned to various contracts. Auditors focus on this in the context of standard accounting practices rather than as a retroactive measure. 

For example, travel costs for engineers may be treated differently depending on their purpose. Travel that supports a single contract line item (CLIN or Contract Line Item Number) is treated as a direct cost and posted directly to that CLIN. Travel that benefits multiple contracts is recorded in an indirect travel pool and allocated later using a consistent method.

A simplified, illustrative GL mapping (General Ledger mapping) table can help show this concept:

Identification of costs by contract / cost objective

A DCAA-compliant accounting system needs to be able to trace specific costs to specific contracts or line items.

In a review, auditors might validate labor and material charges to ensure they sum up properly to the contract cost objective. They review job cost sub-ledgers to make sure there are no discrepancies in the reconciliation of sub-ledgers to the general ledger, ensuring no matter is in doubt. For instance, in a job cost ledger, a simple example of a sub-ledger summary might look like this:

• CLIN 001 — Labor: $5,000

• CLIN 001 — Materials: $2,000

• CLIN 002 — Other Direct Costs: $1,200

Each month, these lines are reconciled to the general ledger account for that contract. 

Logical allocation of indirect costs

Indirect costs are grouped into pools and allocated to contracts using a consistent, reasonable base, such as labor hours or dollars. This approach guarantees that costs remain traceable and are applied consistently.

Key points:

• Allocation must be logical and repeatable.

• Monthly reconciliations and variance checks help confirm accuracy.

• Comparing prior and current rates ensures method consistency.

For example, a $1,200,000 overhead pool over 60,000 labor hours creates a provisional rate of $20/hr. Monthly reconciliations ensure this rate is applied consistently across contracts, keeping the accounting system audit-ready.

Exclusion of unallowable costs

Unallowable costs are those specifically listed in FAR Part 31 that cannot be charged to government contracts. This includes items like entertainment, lobbying, or personal expenses. These costs should be clearly segregated in your accounting system and excluded from both contract billings and indirect cost pools. Proper management ensures that your reports comply with regulatory expectations.

Auditors typically look for:

• Segregation of unallowable costs in dedicated GL accounts

• Verification that indirect pools do not include unallowable items

• Management review or approval memos confirming proper exclusions

A sample GL extract might look like this:

All entertainment expenses recorded under GL 6500 are excluded from contract billing.

Reconciliation between subsidiary ledgers and GL

A reconciliation is the process of comparing subsidiary ledgers (job cost, accounts receivable, accounts payable, payroll) against the general ledger (GL) to ensure accuracy. The objective is to detect discrepancies, determine their causes, and address them promptly.

• Ensures that costs reported to contracts match your books

• Provides an audit trail for DCAA or contracting officer reviews

• Supports accurate billing, indirect cost allocation, and reporting

3-Step reconciliation sample:

Maintain reconciliations on a regular and consistent basis. This should be standard practice throughout the year, and gentle reminders are often more effective than urgent warnings.

Preparing Your Accounting System for DCAA Review

While it may seem like a chore to prepare for a DCAA audit evaluation, it is possible to be sure your computer system is up to par by simply following these easy steps. Listed below is a preparation checklist to follow:

1. Map DFARS Criteria to Your Processes

• Review DFARS 252.242-7006 and map each criterion to your company processes.

• Prepare an SF-1408 style format showing how your accounting system meets each requirement.

• Include details on: cost segregation, timekeeping, indirect allocation, reconciliations, and internal controls.

Tip: Even a concise table linking requirement → system step → responsible owner can make a strong impression.

2. Build an Audit Evidence Kit

Assemble key documentation auditors typically request:

• Last 12 months of general ledger

• 3 months of signed timecards

• Job cost ledger

• Reconciliation files (GL vs subledgers)

• Indirect rate calculations

• Segregation and unallowable cost policies

• Billing backup documentation

These items form the backbone of your audit evidence and show consistent internal controls.

3. Prepare a One-Page System Overview

Create a concise overview for auditors, including:

• Organization chart for accounting/finance roles

• ERP modules and integrations

• Key process owners and contact information

• High-level workflow summary

A clear snapshot helps auditors understand your system quickly, which supports a smoother review.

4. Pre-Award Survey Preparation

• Prepare SF-1408 format before award if you are anticipating a pre-award audit.

• Ensure all evidence kit items are current and complete.

• Conduct an internal review or mock audit to identify gaps early.

This step can reduce surprises during the formal DCAA assessment.

5. Responding to Findings & Remediation

If DCAA identifies weaknesses:

• Understand that under the DFARS Final Rule, any material weaknesses must be addressed promptly.

• Typical timelines:

• 30 days to respond to the auditor’s findings

• 45 days to correct or submit a Corrective Action Plan (CAP)

• Maintain documentation of actions taken and assign owners for each remediation step.

Providing prompt, well-documented responses supports credibility and minimizes the likelihood of challenged costs.

Bottom Line

DCAA compliance can be complex, especially for businesses in the U.S. supporting cost-plus contracts. Achieving compliance involves more than separating direct and indirect costs correctly; it also requires maintaining a detailed audit trail. The requirements are often intricate and demand careful attention.

With extensive experience helping companies prepare for pre-award and post-award audits, CFO Bridge works alongside finance teams to translate DCAA rules into practical, actionable accounting system improvements. Our approach ensures that subsidiary ledgers reconcile cleanly with the general ledger, unallowable costs are properly segregated, and evidence is audit-ready, all while supporting timely indirect rate calculations and internal reporting.

Beyond addressing basic compliance, CFO Bridge helps implement sustainable processes, including DFARS criteria mapping, audit evidence kit preparation, and control workflow design. To maintain audit readiness and avoid potential issues with compliance, U.S. businesses can reach out to CFO Bridge to audit their accounting system to determine potential gaps in preparing for the DCAA audit.