5 DCAA Compliance Mistakes That Small Contractors Keep Making

CPAs who serve government contractors see the same issues repeatedly. These aren't obscure technicalities — they're predictable, preventable mistakes that stem from not having the right systems and processes in place early enough.

What we've seen in practice "The first mistake is not knowing what DCAA-compliant actually means. Bookkeepers buy a 'GovCon chart of accounts,' separate fringe benefits, and call it done. The bigger issue is not knowing what you don't know — there's an entire layer of timekeeping, allocation, and audit trail they haven't even encountered yet."

— Jordan Glaze — Business Development Specialist/Accountant, Wendroff & Associates, CPA

1. Running Timekeeping on Spreadsheets

The logic seems sound: you have five employees and one contract. Why pay for a timekeeping system when Excel works?

The problem isn't accuracy — it's auditability. Spreadsheets have no inherent audit trail. Anyone can change any cell at any time with no record of the original value. They don't enforce daily recording. They don't support approval workflows. When an auditor asks "how do I know this timesheet wasn't modified after the fact?" you have no system-level answer.

Paper timesheets have the same limitation. They may work for very small teams if your manual processes are meticulous, but they're inherently weaker during audits than system-based approaches.

Sarah Sun, CPA, makes the operational case for moving away from manual processes:

"The risk of manual processes is human error. With spreadsheets, you forget to update a formula, you miss a tab, you copy a wrong cell. Automation removes that surface entirely."

— Sarah Sun, CPA — Wendroff & Associates, CPA

The fix: move to a system that creates automatic timestamps and audit trails. Several options exist at different price points — from basic time tracking tools with audit features to full DCAA compliance platforms.

2. Not Structuring the Chart of Accounts for GovCon

Many contractors start with a simple chart of accounts and plan to restructure "later." Later arrives when they win a cost-type contract and realize their books don't separate direct costs from indirect costs, don't distinguish between indirect pools (Fringe, Overhead, G&A), and don't segregate unallowable costs.

Retroactively reclassifying a year of transactions is painful. Worse, if you've already billed based on incorrect classifications, you may need to adjust — which raises questions.

What we've seen in practice "A common error: contractors list each project as a line in the chart of accounts. That's the wrong dimension. You want to look at the P&L vertically — to see at any moment what Project A is costing you and what it's bringing in. Projects don't belong in the COA; they belong in classes."

— Jordan Glaze — Business Development Specialist/Accountant, Wendroff & Associates, CPA

The fix: set up your chart of accounts for government contracting from the start, even if your initial contracts are fixed-price. When cost-type work comes, your accounts are ready. The incremental effort to set it up correctly from day one is trivial compared to restructuring later.

3. Deleting Journal Entries Instead of Reversing Them

You posted labor distribution journal entries for March. An employee corrected their timesheet, and you need to adjust. The instinct: delete the original JE and create a new one.

DCAA prohibits this. Deleting entries destroys the audit trail. The required approach: create a reversing journal entry that offsets the original, then create a new entry with correct amounts. Three entries in the ledger where there was one. The complete history is preserved.

Most accounting software (including QBO) allows deletion of journal entries. The discipline has to come from your process and training — or from a compliance tool that only allows reversals.

4. Ignoring Total Time Accounting

An employee works 9 hours: 6 on Contract A, 1 in a company meeting, 1 on a proposal, 1 on admin tasks. They record 6 hours on their timesheet and skip the rest.

This violates total time accounting. DCAA requires that every hour of every workday be accounted for — direct and indirect. The meeting is overhead. The proposal is B&P. The admin work is G&A. All must be captured.

Why it matters: if only direct hours are tracked, there's no way to verify that the ratio of direct to indirect time is reasonable. An employee who claims 40 direct hours weekly but spends 10 on indirect activities is overcharging every contract.

The fix: require total time accounting in your timekeeping system. Make indirect categories easy to select. Train employees that indirect time isn't "wasted" time — it's legitimate work that needs accurate recording.

5. Having No Written Timekeeping Policy (or an Outdated One)

This seems minor but comes up in almost every pre-award survey. The auditor asks for your timekeeping policy. You either don't have one, or it was written years ago and doesn't describe your current process.

Your policy should cover: when time is recorded (daily), how corrections are handled, who approves timesheets, what categories exist (direct, overhead, G&A, PTO), and consequences for inaccurate recording.

The fix: write it (2–3 pages is enough), distribute it to all employees, collect acknowledgment signatures, and review annually. The content matters less than the alignment between what you write and what you actually do.

The Pattern

All five mistakes share a root cause: treating compliance as something to deal with later. The contractors who avoid these issues are the ones who invest in the right structure and processes early — when the cost and effort are lowest.

Want to find out which of these five gaps you have? Take our free DCAA Readiness Self-Assessment — 9 questions that surface the exact areas you'd lose points on in a real audit.

Reviewed by Jordan Glaze — Business Development Specialist/Accountant — and Sarah Sun, CPA — Wendroff & Associates, CPA.