How to configure Quickbooks to be DCAA compliant

By Mark Vieno, CPA

For most small and medium-sized government contractors, the purchase and implementation of an expensive and difficult-to-use accounting system is not necessary in order to achieve DCAA compliance. An inexpensive and flexible accounting system such as Quickbooks can be easily configured to pass DCAA audits.


One of the services we provide is a configuration service where we make changes to the set up and structure of your Quickbooks file to make it DCAA compliant. We also have many free resources on this site to help you configure your own file.


The chart of accounts is simply a listing of your general ledger accounts, where your transactions are posted in your accounting system. Many clients come to us believing that all they need do to pass a DCAA audit is to have a DCAA-compliant chart of accounts. Unfortunately, there is much more involved. However, a DCAA-compliant chart of accounts is the first step in the process.


You will need to segregate your contracts from one another in your accounting system. If you are currently capturing your billing and cost information at the customer level, and not segregating your contract data, you'll fail the DCAA audit. This is a common mistake. You will also need to clearly segregate your indirect expenses, such as overhead, G&A and paid leave, from your contract data.


Whether you run your payroll outside of Quickbooks with a third-party payroll provider, or you use the Quickbooks Desktop payroll system, you'll need to set up your employees correctly to be able to run a labor distribution in Quickbooks. The employee setup requires compensation data, payroll items, and "check the box" to use time sheets when computing the labor distribution.


You will need a DCAA-compliant time keeping system to pass your DCAA audits. All employees who "touch" government contracting, either directly or indirectly, will need to keep a time sheet and record all of their time worked, every day, including paid leave. Very few time sheet systems on the market are truly DCAA-compliant, regardless of their claims, and using the wrong one risks an audit failure.


Payroll items will need to be set up properly in Quickbooks to generate the labor distribution report, a key report that is central to the DCAA audit. In addition, if you are using an outside payroll service, as most or our clients do, you'll need to develop a new payroll journal entry to interface correctly with the labor distribution process.


Tracking your contract backlog, and ensuring that you do not bill in excess of funding, is critical to passing the DCAA audit. Because spread sheets are notorious for containing formula errors, we recommend setting up your funding system in Quickbooks.


SF 1408 is the audit list used by DCAA to evaluate your system. It's pass/fail and you'll need to pass all the items to receive your certification letter from DCAA. It is highly recommended that you review this checklist before your audit. Most of our clients do not understand the checklist when they read it at first. If this is you, it's probably a good sign you'll fail the audit and may want to consider engaging a consulting firm to assist.


DCAA will want to know how you close your books every month. This involves more than a bank reconciliation. Be prepared to present your monthly closing checklist, showing that you have completed all steps.


Have your DCAA reports ready to print from Quickbooks. Much of the audit will consist of printing reports for your auditor. You will need the Chart of Accounts, Booked vs. Billed, Labor Distribution, Contract Backlog, and Profit and Loss by Job reports. They will also want to see your Trial Balance and General Ledger Detail. Be ready and familiar with all of these reports before the auditor arrives. It will make your audit go much more smoothly.

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