DCAA compliance
DCAA compliance means meeting the audit standards of the Defense Contract Audit Agency, the federal organization that audits cost-reimbursement and time-and-materials contracts with the Department of Defense. For small federal contractors, DCAA compliance covers accounting system structure, daily time tracking, indirect rate calculation, and the discipline to support every charged cost with documentation that would survive an audit. It is not a one-time event — it is an ongoing operating posture.
How DCAA compliance applies in practice
DCAA does not certify contractors as "compliant." Instead, it performs audits — both pre-award (SF 1408 accounting system review before a cost-type contract can be awarded) and post-award (incurred cost audits, labor floor checks, indirect rate reviews). A contractor's compliance posture is judged through those audits, and improvements come from the discipline of running the books as if an audit is coming any week.
- Job cost accounting. The accounting system has to track costs by contract, project, and task — not just by GL account.
- Direct vs indirect costs. Clean segregation between direct contract costs and indirect costs allocated through fringe, overhead, and G&A pools.
- Time tracking. Employees record time daily, by project and task, against the actual hours worked — with supervisor approval and a clear audit trail.
- Labor distribution. Payroll costs flow to the right projects based on time records, with reconciliation between payroll and labor distributed.
- Indirect rates. Pools and bases are defined, calculated consistently, and supported by documentation that would survive a desk audit.
- Allowable costs. The contractor knows which costs are allowable under FAR 31.205 and which are not, and the books reflect that distinction.
Why DCAA compliance matters
For most small federal contractors, the practical answer is simple: you cannot win or keep cost-type DoD work without it. The pre-award SF 1408 review is a gate. Failing it means the contracting officer cannot award the contract. Failing a post-award audit means questioned costs, withheld payments, and sometimes consequences that follow the contractor for years. DCAA compliance is not a nice-to-have for cost-type work — it is the cost of entry.
The strategic reason is bigger. A contractor with a DCAA-compliant accounting system is positioned to take on any kind of federal work — fixed-price, cost-type, T&M, hybrid. A contractor without one is limited to commercial-item-only work where DCAA-compliance is not required, and those contracts are increasingly competitive. The infrastructure investment expands the addressable contract pipeline, not just the current contract.
Closely related concepts
SAM.gov registration
The foundational federal contractor record.
CMMC readiness
The cybersecurity counterpart to DCAA.
Transaction categorization
The bookkeeping discipline DCAA compliance depends on.
Monthly close
The recurring discipline that keeps DCAA-ready books current.
Applied AI
How automation reduces the cost of compliant time tracking and labor distribution.
Document intelligence
For organizing the supporting documents an audit requires.
Common questions about DCAA compliance
Who has to be DCAA-compliant?
Any contractor performing cost-type or time-and-materials contracts for DoD or other federal agencies that use DCAA audit services. Fixed-price contractors face less DCAA scrutiny but still benefit from compliant practices.
What does an SF 1408 review check?
Whether the contractor's accounting system can properly segregate direct and indirect costs, track costs by contract and task, accumulate labor costs by employee and project, and produce the records DCAA needs to audit.
What's the hardest part?
Usually time tracking and indirect rate management. Employees have to record time daily by project and task, with discipline; indirect rates have to be supported with proper pools and bases.
How does AMG help?
We build DCAA-aware accounting and time-tracking infrastructure for small federal contractors — proper project/task structures, daily time entry, audit-ready labor distributions, and indirect rate calculations.
Preparing for an SF 1408 review?
See how AMG builds DCAA-ready accounting and time tracking for small contractors.