Checklist: A guide to DCAA and DCMA compliance

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Checklist: A guide to DCAA and DCMA compliance


Imagine a segment as important as defense and military aviation not having any rules or regulations. Quite unthinkable! Not only will it cost critical missions, but internally too it will affect several aspects right from misjudged timelines or inventory to forfeiting from following best practices.

That is why there are regulatory bodies and agencies that overlook strategic defense, one of the most important functions a nation undertakes, in a world that has an increased number of cross-border joint ventures in defense and aviation. With so many countries focussing towards strengthening their air security, one can only say there needs to be all the more emphasis on monitoring the defense segment.

Two important institutions that do this would be Defense Contract Audit Agency (DCAA) and Defense Contract Management Agency (DCMA), who take care of the contracting function of America’s Department of Defense (DoD). DCMA ensures that supplies and services are delivered on time, at a cost that was earlier forecast and checks other related requirements. DCAA screens the accounting systems of government contractors who are engaged with work for the DoD.

It is compulsory for companies that deal with government contracts to have their system maintained as per DCAA and DCMA requirements. There are plenty of challenges when it comes to executing tasks related to this function – such as maintaining information of all costs like materials, labor, and indirect costs since it requires to be published to the government for review. Or being subject to audit at any point in time. All the data input into the system has to be reviewed in detail with the maker-checker process and internally reviewed by different departments.

Federal Acquisition Regulation (FAR) 16.301-3, which defines the appropriate contract that has to be drawn for relevant procurements, states that a cost-reimbursement type contract may be used only when the contractor’s accounting system is adequate for determining costs applicable to the contract. A “Pre-Award Survey of Prospective Contractor Accounting System” (SF1408) checklist will be required to be filled and provided to Defense Contract Audit Agency (DCAA) for contract approval.

When it comes to defense software, there needs to be niche modules and solutions that can specifically answer the questions that the defense and military aviation segment poses. What can come to its aid? An integrated Aviation ERP system with financial functionality can be of great help when it comes to enabling DCAA and DCMA compliance by addressing key requirements that include:


  1. Accounting system in accord with generally accepted accounting principles

An effective defense ERP should be capable of maintaining books of accounts as per General Accepted Accounting Principles (GAAP). It also needs to support the accrual-based accounting concept and provide control and flexibility with centrally configured rules for consistent and reliable accounting.

  1. Proper segregation of direct costs from indirect costs

The application should have the ability to define general ledger account with direct/indirect cost option with an additional flexibility to define a variable or fixed cost. In the context of the maintenance jobs executed on aircraft/part, direct costs associated with a work order like material cost, labor cost, resource cost, external repair cost, and external services cost and other charges have to be tracked and recorded directly to the job. The application should be capable of maintaining the detailed work breakdown structure (WBS) as specified in the contract for cost tracking. Indirect costs related to the jobs have to be collected and allocated separately to jobs for reporting purposes.

  1. Time Tracking System with labor cost distribution

One of the key requirements of defense software is that it must allow employees to record time at WBS level with approval mechanisms for review and audit. Labor costs associated with time booking have to be computed based on rates fixed by the government or internally computed as the fully burden rate. Summary information of costs with back up details of employee information, time booking details, cost information, and cost break-up details are required to be produced to the government for review.

  1. Identification of costs by contract line item and by units

The application should have the option to record Contract Line Number (CLIN), Sub Contract Line Number (SLIN) and Accounting Reference Number (ARN) along with the details of the total contract amount and initial and subsequent funded value. All associated costs should be linked at Contract Line Level for government billing and audit purpose.

  1. Segregation of pre-production costs from production costs

A good aviation suite should have the capability to segregate pre-production costs and production costs related to a contract. Information should be available in detail for time booking and resource utilization.

  1. Accounting system that shares insights on cost limitations and progress payments 

Your defense ERP should have the option to identify budgeted information and ensure billing is not recorded more than the allotted amount. The system should alert users on the progress of a particular project with possible cost escalations and details of progress payments that can be provided for review. Defense software should also be able to provide an analysis of Earned Value Management for the contract. Information related to Planned Value, Earned Value and Actual Cost will be required to track the project progress and alert the government on possible escalations.

This is the second part of the three-part series on Defense Requirements. Read the first part here.

Stay tuned for the final part of the series.