Is QuickBooks DCAA Compliant?
I am asked this question all the time and thought I would offer some insight. The answer is No, QuickBooks is not compliant by itself. Further, contrary to what I hear, there is not any such thing as a DCAA approved accounting system software package. 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. In addition, the contractor must maintain adequate policies, procedures and internal controls such as timekeeping and labor reporting. Without proper internal controls your accounting system is guaranteed to fail the test no matter what software you use. Finally, the personnel that perform the accounting function must be properly trained in the policies/procedures and government contract accounting in general. If the personnel do not consistently apply these procedures and sound government contract accounting practices, the software and the internal controls will not matter, you will fail the test.
QuickBooks is an easy to use and actually a pretty decent project accounting system for small businesses. If it is properly set up and the accounting practices employed are sound and consistently followed, QuickBooks can be DCAA compliant. I know this from repeated personal experience with many successes with small businesses of all types.
But in order to make QuickBooks compliant, there are a number of enhancements that must be made. First, QuickBooks 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. Most small businesses can get by with just two, fringe and G&A.
After this is complete, then contractors need to develop the policies that are required to meet FAR and DCAA audit requirements. This is a manageable list. 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
- Others as circumstances may warrant
Finally, the contractor must resolve the items that QuickBooks simply does not handle well as it falls short in a number of areas that government contracts require. The main short fall is project reporting. Simply put, QuickBooks does not do a good job providing the reports that DCAA typically seeks. Customized cost reports will need to be created to meet these requests. Also the QB timekeeping system falls short of DCAA requirements. These are the major short falls. There are some minor ones as well.
A contractor can overcome these short falls by implementing enhancements. One is generating templates that report on the information DCAA requires. The main one is a project report that shows costs by cost element by current period, year to date and contract inception to date. This report needs to include a full allocation of indirect costs and the report should make a comparison of costs incurred to project funding. Other include indirect cost rates, allocation of indirect costs to projects and a compliant labor distribution.
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 applications 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. I have experience with a number of these packages including ICAT, Gov-Calc, Rates Plus, EFAACT, etc. There are a number of other applications on the market as well. I do not endorse any package in particular. Each has its strengths and weaknesses. Each has its own unique approach. Some are simple to implement while others are more advanced. The more advanced packages offer more capabilities. Application selection should be based on your own unique circumstances selecting the package that works best for you.
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.
Another short fall is QuickBooks does not accrue payroll. It is very important that payroll, direct and indirect labor be recorded in the period incurred not necessarily the period paid. The contractor should develop a remedy for this condition.
QuickBooks DCAA Compliance
Making QuickBooks DCAA compliant is certainly a possibility with proper set up, internal controls and enhancements. These tasks are not overwhelming. I have done it in less than a week’s time on numerous occasions. And this is good news for small businesses. But as mentioned above there are extra applications and a number of work arounds similar to a band aid approach. But QuicksBooks is really the only viable solution for the very small business with limited accounting resources.
Procas is a better option but in my opinion some government contract accounting expertise and experience is needed. It is integrated and it offers online capabilities, but most important if set up properly it is DCAA compliant for small business. Of course there are a number of other middle ground solutions available for small businesses that may prove more effective than Quick Books. However
The next viable solution is to move up the chain to a more robust integrated government contract accounting system such as JAMIS or Deltek. These are industry leaders with a comparable price tag. They also require a a significant accounting resource. Neither of these are normally available to the average small business due to price and accounting resource limitations inherent in the small business community. These systems are excellent for government contracting and are typically more than most small businesses can handle in my opinion.
Procas, Deltek and JAMIS are good solutions. However accounting resources are required in my opinion. Absent these resources, Quickbooks as described above is really the only alternative for the very small business. Coupled with a DCAA cost reporting application and a DCAA compliant timekeeping solution, small business can pass DCAA audits with proper policies and procedures as well as training.
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 recommend that a contractor get the advice and help of a qualified government contracts professional. I have 28 years experience at government contracting, government contract accounting systems, DCAA compliance and audits. I have developed or participated in the development of DCAA compliant systems on a continual basis. In many cases, I have completed this objective in less than a week’s time. These contractors have passed DCAA audits and have secured government approval of their accounting systems without exception.