Are You Ready For A DCAA Audit?

DCAA Compliance News

November 30, 2022

Man's arm sticking up out of a pile of papers indicating he's OKA DCAA audit is an inevitability. The government, quite understandably, wants an accurate accounting of funds. They have an obligation to the taxpayer, and also to the war fighter, the ultimate beneficiary of any federal contractor’s work for the Department of Defense.

DCAA Compliance audits are a reality and audits are nothing to fear. It’s all about preparation and accountability. Accuracy and completeness in calculations of direct, indirect, and unallowable costs is paramount.

Any DCAA audit requires the full attention of the contractor, from the initial notification and meeting, right through to the exit conference.

When you receive an audit notice, we recommend you complete the following tasks:

  • Review the auditor notification that an audit is planned.
  • Ensure an understanding of subject of audit and all requests, and identify any areas needing clarification.
  • Meet the auditor’s schedule for entrance and initiation conferences (which may occur on the same day).
  • Make arrangements for necessary workspace and agree to on-site visit date only when ready to support auditor’s needs, and pertinent employees are available.
  • Gather the appropriate data dependent upon relevant factors such as the purpose of the audit, financial statements, historical incurred costs, etc.

Contracting with the Federal Government Makes Your Accounting Records Subject to Audit

There are numerous types of audits that the Defense Contract Audit Agency (DCAA) performs, but most audits can be divided between those relating to the period before the contract award and those relating to the period after the award.

Before a contract award, the DCAA may be tasked with determining the adequacy of your accounting system and examining your Contract Price Proposal for fairness prior to contract negotiations. Further, the DCAA is tasked with examining your Forward Pricing Rate Proposal. This establishes future period indirect rates and labor rates.

After a contract award, the DCAA may be tasked with examining your historical costs to determine annual indirect cost rates. Additionally, they will examine your claims in the event of contract terminations or government-caused delays or disruptions.

Large contractors are subject to further audits, such as those relating to Billing Systems, Material Management, and Estimating Systems. Also, compliance with the federal Cost Accounting Standards (CAS) applies primarily to larger contractors and may also be the focus of an audit.

Adequate preparation for a DCAA audit will go a long way toward producing beneficial results for a contractor and all company personnel involved in the process. The audit process will be less stressful if your company already has its “house in order,” so to speak, with adequate controls and procedures in place to catch most errors. Being prepared for an audit will greatly increase the likelihood of a successful audit outcome.

Let’s face it. No federal contractor enjoys the DCAA audit process or any aspect of an audit. Taxpayers and Congress demand a reduction in fraud, waste, and abuse. In preparing for your firm’s next audit, the best thing you can do is to minimize your risks. Incurred cost proposals (ICE submissions) are due on June 30th. As such, get an early start so that your proposal falls into the “low-risk” category.

You should be familiar with the Contract Audit Manual (CAM), found at Your goal is to enjoy the lowest possible risk rating by DCAA. Keeping abreast of audit requirements is also the responsibility of all contractors awarded government funds, however. One great resource to this end is offered at Select “Course 8: Accounting and Finance,” and then refer to Tutorials 7 & 8. Take the short self-assessment quizzes you’ll find therein if you dare! There are also helpful links provided if you should wish to delve deeper into FAR 31.205-46, amongst other things. Of course, you’ll also want to read FAR 52.216-7(d), pertaining to final indirect cost rates.

The risk of a DCAA audit is also impacted by the number of questionable areas in your last audit, the maintenance of an adequate accounting system, and the timeliness of ICE submissions. Of course, effective communication internally and with the DCAA is essential, as is a warm welcome when they come knocking.

Keep Calm and Make Sure You Have Good Timekeeping

Timekeeping is always a hot-button issue for DCAA auditors. Compliance is non-negotiable, as stringent guidelines must be followed! There is a learning curve involved in getting all employees up to speed, and everyone is responsible for accurate time reporting. Training is an essential requirement, and all timekeeping training must be documented. It’s best when you can demonstrate that you have proper internal controls for tracking time for employees.

Here are a few basic tips to help ensure that you are following the best timekeeping practices:

  • You must have an adequate timekeeping policy in place. 
  • It is imperative that all employees must record their time each day, in ink, or use an electronic system.
  • Employee maintains control of their own timesheet.
  • All vacation, sick, holiday, and other leave time must be recorded accurately.
  • All employee time worked must be recorded and approved by their supervisor.
  • Timekeeping training must be conducted annually.
  • Proper project names and job codes must be included in employee timekeeping.
  • Test accuracy of timekeeping procedures and controls regularly.

Did You Know… Accounting and Most Legal Services MAY Be “Free” To Your Firm!

Accounting services may be included in indirect costs. Most federal contractors are unaware that specialized DCAA Compliance accounting services may be included in their contract indirect costs.

Here is the direct language from the FAR:

FAR 31.205-33(a) defines allowable professional and consulting services costs as services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor.

These can be services to enhance the contractor’s legal, economic, financial, or technical position, but contractors should place special emphasis on the phrase “special skill” in that definition to properly categorize the services as consulting or purchased labor.

Questions? Please call us at 603-881-8185 or send an inquiry from our contact page:

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