A DCAA 1408 review, also known as a Pre-award Accounting System Audit, is a process conducted by the Defense Contract Audit Agency (DCAA) to evaluate the design and operational efficiency of a contractor’s accounting system before awarding any cost-reimbursement or other high-risk contracts.
Key components of a Pre-award Accounting System Audit include:
Accounting System: The DCAA will evaluate the adequacy of the contractor’s accounting system in tracking costs applicable to the proposed contract.
Applicable costs, as reviewed in a DCAA 1408 audit, generally consist of direct and indirect costs. An example of a direct cost is the salaries of employees who are involved in manufacturing a product or delivering a service directly related to the contract. This cost is easily traceable to a specific contract. An example of an indirect cost, on the other hand, could be overhead costs such as rent or utilities for the company’s facilities. These costs cannot be directly linked to a particular contract but are necessary for the overall operation of the business.
Internal Controls: The DCAA will assess the effectiveness of internal controls in detecting errors, fraud, and non-compliance.
Examples of internal controls include segregation of duties, where responsibility for related activities is divided among different people to minimize the risk of error or fraud. Another control is the physical audit of assets, wherein an organization’s physical inventory is periodically checked against the accounting records. Additionally, there are document controls such as prenumbered invoices to track and record transactions. Finally, access controls are essential, involving the use of passwords and other authentication methods to limit access to financial and operational systems. These controls are crucial for maintaining the integrity of an organization’s financial and operational information and minimizing risk.
Labor and Timekeeping: The DCAA will examine the contractor’s labor and timekeeping practices to ensure they meet DCAA standards.
- Daily Timekeeping: Record employee labor hours daily. Each employee should record their time spent on individual tasks or projects.
- Time Sheet Approval: Require both employee and supervisor signatures on timesheets. This practice ensures responsibility and accuracy in reported work hours.
- Clear Labor Charging Instructions: Provide clear guidelines to employees on how to charge labor costs. Clear and concise instructions help prevent mischarges and errors.
- Record Changes: Maintain a record of any changes made to the timesheet. This includes noting the reason for the change and who authorized it.
- Annual Training: Conduct annual training for employees on proper timekeeping procedures. Regular training ensures that all employees understand and comply with DCAA timekeeping standards.
Indirect Cost Allocation: The DCAA will review the contractor’s method for allocating indirect costs to ensure it is equitable and consistent.
Indirect costs, as the name implies, are expenses that are not directly attributable to a specific contract but are necessary for the overall running of the business. These costs are spread out across all projects and functions of the company. Here are some examples:
Financial Capability: The DCAA will assess the contractor’s financial health to determine if they are financially capable of performing the contract.
The purpose of a DCAA 1408 review is to protect the interests of the government by ensuring that contractors have the necessary systems and practices in place to manage government funds effectively and transparently. It is a crucial step towards becoming a government contractor.
Hour Timesheet can assist significantly in preparing for a DCAA 1408 review. This cloud-based timekeeping software is specifically designed to meet DCAA standards. For labor and timekeeping, Hour Timesheet automatically records employee work hours on daily tasks, significantly reducing the risk of errors. The software requires both employee and supervisor signature confirmations, ensuring responsibility and accuracy. It also allows for records of any timesheet changes, including reasons and authorizations. With Hour Timesheet, you can provide clear labor charging instructions and conduct annual timekeeping procedure training. Furthermore, Hour Timesheet’s robust features support indirect cost allocations and provide a transparent, auditable trail of financial capabilities, further enhancing your readiness for a DCAA 1408 review.