Is QuickBooks DCAA Compliant?

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. But in fairness, there is not a single accounting system software package out there that is compliant by itself, contrary to what sales people may have to say. 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.

Compliance

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

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. So I have to give credit to QuickBooks for developing an easy to use tool for small businesses.

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. 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.

Reporting 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. 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.

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. There are work a rounds for this and I will be glad to offer them. Please contact me about this if needed.

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, as there really is not a very plausible alternative available to small businesses. 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. These systems are excellent for government contracting and are typically more than most small businesses can handle in my opinion.

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 26 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, certainly less than two weeks time. These contractors have passed DCAA audits and have secured government approval of their accounting systems.