The Defense Contract Audit Agency (DCAA) is an agency that was established to audit and monitor contracts that have been entered into with the Department of Defense. The DCAA has outlined a number of criteria that the systems run by contractors involved in contracts with the Department of Defense, must comply with.
The intention behind this document is to outline those criteria and to provide recommendations as to how, through the use of Eralis Job, these criteria can be met. A word of caution must be provided in that, the ability to meet these criteria is dependent on how you setup and configure, both SAP Business One and Eralis Job. Whilst we can provide recommendations as to how the criteria can be met, the recommendations outlined are not an exhaustive list of how the system must be configured. Our recommendations must be considered in light of customer requirements and other aspects of the implementation at the same time.
The information that this document is based upon is drawn from the Information for Contractors Guide (DCAA Manual 7641.90) dated June 2012, and the FAR Cost Principles Guide dated January 2013.
Outlined inside the FAR Cost Principles Guide (January 2013) are ten provisions that must be complied with if a contractor is, or is wanting to, undertake contracts associated to the Department of Defense.
Below is a discussion about each of the provisions along with, where necessary, recommendations on how to comply and meet the requirements.
1. Proper segregation of direct costs from indirect costs
The DCAA requires that segregation is maintained between direct and indirect costs.
According to FAR 31.202, direct costs are any costs that can be specifically and directly attributed to an aspect of the contract or job that is being undertaken by the contractor. An example would be any timesheet information, materials or expenses which were incurred in carrying out a job.
FAR 31.203 defines indirect costs as those that cannot be specifically allocated to a job, or costs that apply to multiple jobs, but with no specific manner to directly apply the cost to the applicable jobs. An example of a pure indirect cost could be general administrative overhead that is incurred by the company and does not have a direct relationship to a job. An example of the costs incurred that apply to multiple jobs with no direct allocation could be the rent or electricity incurred in a warehouse or manufacturing area where work is done on several contracts. All the contracts benefit from the costs incurred, but there is no specific manner in which you can allocate them directly.
Segregating costs is not difficult. By default, any timesheets, materials or expenses that are processed to a job should, in effect, be direct expenses. Indirect expenses would generally be processed outside of Eralis Job as standard journal entries or A/P transactions to the profit and loss.
The DCAA requirements do allow for the apportionment of indirect costs through to a contract or job, provided that the method used to allocate these costs to the job is logical and consistent.
If indirect costs are going to be allocated out of the P&L onto a job, you have the option of processing these transactions as job journal entries or as a direct material entry using a non-inventory item inside Eralis Job. These transactions will need to be flagged as an apportionment of indirect costs in order to meet the criteria. This can be done in the following manner:
- Using a specific non-inventory item code, or a property on the item code, to identify that the item code(s) used relate to an indirect expenditure.
- Using either the Analysis 1 or Analysis 2 field to identify the transaction as indirect.
- Using a User Defined Field on the job line to identify the transaction as indirect.
- Using a separate subjob to hold the indirect costs, with an appropriate distinguishing category. This method would be the preferred option to simultaneously meet the next requirement to hold an accumulation of direct costs.
The option that you choose will need to be based on other configuration requirements for the overall solution.
2. Identify and accumulate direct costs by contract
The DCAA requirement is that the accounting system must be able to accumulate direct costs per contract.
Eralis Job allows you to accumulate costs per contract (a contract would be the equivalent to a job inside Eralis Job). Based on the requirement to segregate direct costs and indirect costs, we would recommend the use of separate subjob(s) to hold the indirect costs; this way you can clearly see what the accumulated costs are on the Transactions tab of the direct subjob(s).
3. A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives
This requirement addresses the manner in which the company determines how to allocate indirect costs to jobs. The underlying requirement is to ensure that the portion of indirect cost that is allocated to a job is related to the benefits realized on that particular job. An indirect cost may not be allocated to a job if that job has not benefited by the cost being incurred.
It is outside the scope of this document to outline how costs should be allocated, as the method will change for every company and for every cost type. We have discussed in the segregation of costs how these costs can be transacted against the job, but it is up to the company to determine the quantity and value.
4. Accumulation of costs under general ledger control
This DCAA requirement deals with the integration between Eralis Job and the general ledger. The DCAA wants to ensure that the costs incurred against a contract can be reconciled to the general ledger.
Given that Eralis Job is completely integrated with SAP Business One at all levels, including the general ledger, standard functionality of the system meets this requirement. Reconciliation reports for the main Eralis Job control accounts are included within the standard Eralis Job reports.
5. A timekeeping system that identifies employee labor by intermediate or final cost objectives
The tracking and recording of timesheets is discussed in a fair amount of detail within the DCAA requirements because it generally forms a large part of the cost of any contract and there is no supporting external documentation. Therefore, the DCAA has several recommendations for controlling timecards, especially in an environment where they are manually generated.
The controls around a manually created timecard fall outside the scope of this document; however, the standard timesheeting functions within Eralis Job meet the fundamental requirement of tracking labour against a specific cost objective (either a job or activity within the job).
Direct timesheet entry into core Eralis Job currently provides no approval process and the job is updated directly. This would then require a supervisor to review the timesheets and make any necessary adjustments to the job. However, it is possible for timesheets to be saved as ‘draft’ and then reviewed by a supervisor before being posted to the job.
If the company is intending to have each employee record their own timesheets directly into the system, we would recommend using our web-based time entry application, which has built-in approval management for timesheets and expenses.
With the approval procedures inside the web-based system, the staff member can record their time, but a supervisor (either a staff manager or project manager) must review and approve the timesheets before the job can be updated.
6. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives
This DCAA requirement ties closely back to the first requirement of being able to separate out direct and indirect costs, along with the requirements for the timekeeping system. Essentially, the DCAA requires that staff account for all their time at work, whether they are working on a contract or not. This results in an issue whereby any down time, such as breaks, non-contract related meetings, etc. need to be tracked but not attributed to contract or direct work.
To achieve this, an internal non-productive job will need to be created within Eralis Job, assigned to a category for indirect costs (this category can be the same as the category mentioned in the first requirement for segregation of costs). The staff can use this for recording time against indirect, non-productive time. This structure gives the company greater visibility on how much time is being allocated to non-productive work, as well as meeting the necessary DCAA requirements.
7. Interim (at least monthly) determination of costs charged to a contract through routine posting to books of account
The essence of this requirement is that Eralis Job should post through to the general ledger on a frequent basis (at least monthly) to ensure that performance and cost related reports can be extracted to establish the status of the contract.
Eralis Job has a live integration into the general ledger, allowing for performance and status reporting at any stage.
8. Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR Part 31, Contract Cost Principles and Procedures, or other contract provisions
This requirement is intended to ensure that costs which have either been excluded from the contract, or which are expressly disallowed in the FAR Cost Principle Guide, can be separated from the costs being allocated and recovered from the contract. For example, the cost of bad debts is expressly disallowed under FAR 31.205-3.
In relation to job management within Eralis Job, we cannot prevent someone from allocating costs directly to a job; however, it is relatively simple to separate out costs that are allocated to a job and costs that are allocated directly to overhead expenses. To enter a cost that is disallowed, which may arise from A/P transactions or from some other source, simply do not allocate the transaction to a job or subjob within the data entry screen. Through standard SAP Business One processing, the expense will not be allocated to the contract expenses.
9. Identification of costs by contract line item and units (as if each unit or line item was a separate contract) if required by the proposed contract
This requirement stipulates that costs associated to certain items, which will be outlined in the negotiated contract, must be readily identifiable.
There are a couple of ways this can be done, depending on the way in which you structure your job. In essence, all that is required is to relate the costs incurred through to a specific cost group, which represents the cost item that is being tracked. This could be done in any of the following ways:
- The use of an analysis code on the job line which allows you to allocate the cost to a cost group (item). However, the analysis codes are system wide and as such would be available throughout all jobs within Eralis Job.
- The use of a User Defined Field on the job line to hold the cost group. The downside of this approach is that it may be fairly labour intensive to manage.
- Possibly the best and most efficient option would be to use subjobs, where each subjob represents a specific cost item. This is a clean and efficient method of holding all costs associated to your contract items.
If you are making use of the Eralis Job Contract Module to carry out the invoice processing for the related job, please note that you can link a billing phase within the contract through to a subjob or multiple subjobs. This can be achieved by right clicking on the contract line and choosing the Link to Subjob option. In this manner, you can more accurately carry out billing from the contract phase, incur costs at the subjob level, and have greater transparency on the overall profitability and cost accumulation per item.
10. Segregation of pre-production costs from production costs
The DCAA requires that pre-production costs can be easily and clearly separated from production costs.
This requirement would most likely only come into play when you are using Eralis Job in a make-to-stock scenario. In this case, the need to separate out the pre-production costs, such as the setup and configuration of equipment to do the production, can be easily obtained using a separate subjob for pre-production costs. Although less preferred, you could also use analysis codes on the job line.
To be compliant with DCAA requirements, there are combined system requirements as well as configuration requirements. We certainly believe that a combined SAP Business One and Eralis Job solution can meet all DCAA requirements, so long as the system has been configured and setup in the correct manner.
Within this document our intention has been to outline the various audit requirements that have been laid out by the DCAA, as well as to provide recommendations of the options that are available to meet these requirements. We would however recommend that you make yourself aware of these regulations to ensure that the system is configured in the correct manner to fully comply with DCAA regulations.
Additional information relating to DCAA requirements can be found at www.dcaa.mil.