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 see all the time, 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
- Timekeeping and labor reporting consistent
with DCAA requirements
- Indirect cost pools,
allocation bases and indirect rate calculations
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. Overall QuickBooks is a decent project accounting system if properly set up. But it does
fall short in a number of areas. The main short fall is project reporting. Simply put, QuickBooks 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. These are the major short falls. There are some minor
ones as well.
A contractor can overcome these
short falls by implementing enhancements. Such as 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 needs to be compared to the project funding.
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. I have experience with a number of these packages
including ICAT, Gov-Calc, Rates Plus, EFAACT, etc. 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. And of course there are others.
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.
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. There are work a rounds for this and I will be glad to offer
them. Please contact me about this if needed.
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 the QuicksBooks is really the only viable solution for the very small business with limited accounting
Procas is a better option
but in my opinion some accounting resource is needed. It is integrated and it offers online capabilities, but most important
if set up properly it is DCAA compliant for small business. I have reviewed and tested it and recommend it provided
there is accounting resource to draw upon to run it. I believe it is a batter option than Quick Books if the contractor
has some accounting resource to apply to the system. It is also reasonably priced for the small business.
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
Procas, Deltek and JAMIS are
best integrated options that I have reviewed or tested. 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 highly 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. Of course, provided they follow through.
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