DCAA compliance means ensuring that your business processes, financial records, and internal controls align with the strict standards set by the Defense Contract Audit Agency. The DCAA's primary function is to verify that taxpayer dollars are spent responsibly and that contractors strictly adhere to the Federal Acquisition Regulation (FAR), particularly FAR compliance regarding Part 31 Cost Principles. 

It is important to understand that the DCAA does not evaluate your physical contract performance or project delivery, that is the job of the Defense Contract Management Agency (DCMA). Instead, the DCAA focuses entirely on government contractor accounting practices. Maintaining a compliant accounting system proves to the government that you can accurately track, segregate, and allocate every dollar billed to a federal contract. 

Preparing for a DCAA audit can feel overwhelming, especially for growing government contractors. Yet, many adverse audit findings stem from highly avoidable issues like inconsistent timekeeping, incomplete documentation, or weak internal controls. When the Small Business Administration (SBA) issued its sweeping program-wide audit data call, it proved that federal oversight can intensify rapidly, leaving unprepared firms in a difficult position. 

A structured DCAA compliance checklist helps your team identify operational gaps before an auditor does. In this guide, you will learn the essential compliance areas every federal contractor should review and practical steps to stay audit-ready throughout the year. 

Common DCAA Compliance Mistakes 

Even well-intentioned firms fall into compliance traps due to systemic gaps in their daily routines. Four common pitfalls include: 

1. Inconsistent Timekeeping: Sloppy time tracking is historically the most frequent audit deficiency. When employees log hours at the end of the week from memory rather than recording them daily, the accuracy of your contract billing erodes, triggering immediate red flags during unannounced floor checks. 

2. Poor Documentation: An entry in a general ledger is not enough to pass an audit. Missing source receipts, vague journal entry descriptions, or unverified subcontractor invoices create gaps that often result in auditors retroactively disallowing those specific expenses. 

3. Incorrect Cost Allocation: Mixing direct project expenses into general overhead accounts or failing to isolate unallowable costs like entertainment or alcohol into unique accounts violates FAR Part 31. This can cause you to overcharge or undercharge the government, skewing your true corporate profitability. 

4. Manual Processes and Spreadsheet Reliance: Relying on separate Excel sheets to manually compute indirect costs, calculate labor distribution, or track project budgets is a major risk factor. Disconnected systems slow down operations and increase the likelihood of human typing errors.

The Ultimate DCAA Compliance Checklist

To pass a pre-award accounting system review (SF-1408) or an intermediate post-award audit, your financial infrastructure must meet specific operational criteria. Use this baseline checklist to evaluate your current system's readiness: 

□ Maintain accurate daily employee timekeeping. Employees must log their hours daily, allocating time to specific, approved project task codes. 

□ Separate direct and indirect costs. Maintain a clear, logical separation between direct contract expenses and indirect corporate overhead pools. 

□ Keep supporting documentation for every transaction. Digitally attach vendor invoices, corporate travel receipts, and signed purchase orders to matching ledger entries. 

□ Use a consistent labor distribution process. Automatically reconcile logged labor hours with total payroll expenses, accounting for uncompensated overtime. 

□ Document accounting policies and procedures. Maintain formal, updated written policy manuals that dictate timekeeping, expense, and allowability rules. 

□ Review indirect rates regularly. Calculate and monitor actual year-to-date fringe, overhead, and G&A rates monthly against forward pricing models. 

□ Maintain a complete audit trail. Ensure the system automatically logs who made a transaction change, when it occurred, and the prior value state. 

□ Approve timesheets promptly. Supervisors must electronically review and sign off on team hours immediately following the close of a pay period. 

□ Conduct periodic internal compliance reviews. Run internal mock audits quarterly to stress-test your system data before federal auditors schedule an official visit.

□ Ensure software supports GovCon requirements. Ditch generic financial tools for a platform built natively around project-based ledger structures and federal constraints. 

How Technology Supports DCAA Compliance 

Modern DCAA-ready accounting software removes the manual burden of federal compliance by building regulatory guardrails directly into your daily operations. A specialized, project-based Enterprise Resource Planning (ERP) platform acts as a unified hub for your entire business. 

Instead of managing separate applications, modern platforms automate time tracking, calculate complex labor distribution, and track indirect rates automatically. Financial managers gain real-time visibility into burn rates and project health through automated compliance dashboards, while generation tools compile complete audit documentation packages in seconds. 

Modern GovCon ERP solutions, such as SumX ERP, help small and mid-sized contractors streamline these complex accounting structures. SumX delivers automated workflows and structured audit controls in an affordable, fast-to-implement package, providing enterprise-level security without the administrative weight of legacy software. 

Frequently Asked Questions 

What is the purpose of a DCAA compliance checklist? 

It serves as an internal health assessment tool, allowing contractors to verify that their timekeeping, financial documentation, and internal control tracking match DCAA expectations long before an official audit begins.

Does DCAA certify accounting software? 

No. The DCAA does not certify, endorse, or recommend any specific software products. Auditors evaluate the compliance of a contractor’s total accounting system—which includes the software, internal policies, employee habits, and management workflows—during formal reviews. 

How often should contractors review compliance? 

Contractors should perform internal mock checks quarterly. Regular reviews catch data anomalies early, keep employees aligned with corporate policies, and ensure system documentation remains complete. 

What records should be retained for a government contractor audit? 

Under FAR 4.703, contractors must retain timekeeping sheets, payroll documentation, direct and indirect cost calculations, vendor receipts, contracts, and matching financial books for a minimum of three years following final contract payment. 

Conclusion: Build a Compliant Foundation for Growth 

DCAA compliance is not achieved through last-minute preparation. It is built into your daily operations. By utilizing a structured compliance checklist, maintaining clean documentation, and strengthening internal controls, government contractors can minimize audit risk and bid on larger federal awards with complete confidence. 

If you are looking for a simpler way to manage compliance without heavy administrative overhead, modern GovCon ERP platforms like SumX can automate your timekeeping, accounting, cost allocation, and reporting to help your entire team stay audit-ready year-round. 

Ready to modernize your compliance strategy? 

Schedule a personalized demo to see how SumX helps government contractors simplify DCAA compliance.