DCAA Audit Preparation Guide 2025: Accounting Systems & Compliance
Complete guide to DCAA audit preparation for government contractors. Learn about adequate accounting systems, incurred cost submissions, floor checks, and how to pass DCAA audits.
Quick Answer: What is DCAA?
The Defense Contract Audit Agency (DCAA) audits government contractors to ensure costs are reasonable and allowable. DCAA audits are primarily required for cost-reimbursement contracts and flexibly-priced contracts. Key requirements include an adequate accounting system, timely incurred cost submissions, and compliance with FAR cost principles.
What is DCAA?
The Defense Contract Audit Agency (DCAA) provides audit and financial advisory services to Department of Defense and other federal agencies. DCAA ensures that taxpayer dollars are spent appropriately by verifying contractor costs are:
DCAA Evaluates Whether Costs Are:
Allowable
Permitted under FAR Part 31 cost principles. Certain costs like entertainment, lobbying, and alcohol are always unallowable.
Allocable
Properly assigned to the contract that benefited from the cost. Costs must have a causal relationship to the contract.
Reasonable
Similar to what a prudent business person would pay in the same circumstances. Not excessive or extravagant.
Compliant
Consistent with Cost Accounting Standards (CAS) if applicable, and contractor disclosed accounting practices.
When Will You Be Audited?
Not all contractors face DCAA audits. Your audit risk depends on contract types and dollar thresholds:
High Audit Risk Contracts
Cost-Reimbursement Contracts (CPFF, CPIF, CPAF)
Government pays actual costs — high incentive to audit what you are charging.
Time and Materials (T&M) Contracts
Labor hours and rates subject to verification. Material costs must be reasonable.
Large Fixed-Price Contracts
Forward pricing audits may be required to verify proposed costs.
Lower Audit Risk
Firm-Fixed-Price (FFP)
Minimal audit exposure since government pays a set price regardless of your costs.
Commercial Items
Commercial item contracts have reduced audit requirements.
Adequate Accounting System
DCAA uses Standard Form 1408 to evaluate whether your accounting system is adequate for cost-reimbursement contracts. Key requirements include:
SF 1408 Requirements
Job Cost Accounting
Segregate costs by contract/job
Timekeeping System
Track labor by contract and category
Direct/Indirect Segregation
Separate direct and indirect costs
Indirect Rate Pools
Calculate fringe, overhead, G&A rates
Cost Accumulation
Accumulate costs for billing
Budget vs Actual
Compare budgets to actual costs
Unallowable Costs
Identify and exclude unallowables
Internal Controls
Prevent unauthorized charges
QuickBooks Warning
Standard QuickBooks is typically not adequate for government contracting without significant customization or add-on modules. Consider government contractor-specific software like Deltek Costpoint, Unanet, or JAMIS.
Types of DCAA Audits
Pre-Award Accounting System Audit
Evaluates whether your accounting system is adequate before award of a cost-type contract. Uses SF 1408 criteria. Required for flexibly-priced contracts.
Incurred Cost Audit
Reviews your annual Incurred Cost Submission (ICS) to verify costs claimed on cost-type contracts are allowable, allocable, and reasonable.
Forward Pricing Audit
Evaluates proposed costs in your proposals. Reviews labor rates, indirect rates, and other cost elements for reasonableness.
Floor Check
Unannounced visit to verify timekeeping and labor charging practices. DCAA may observe employees, review timesheets, and interview staff.
Audit Preparation
DCAA Audit Preparation Checklist
- ☐Document accounting policies in writing
- ☐Maintain timekeeping records and approvals
- ☐Keep supporting documentation for all costs
- ☐Calculate and document indirect rates
- ☐Identify and segregate unallowable costs
- ☐Submit ICS within 6 months of fiscal year end
- ☐Train employees on timekeeping requirements
- ☐Establish internal audit/review processes
Common Audit Issues
Timekeeping Problems
- • Employees not recording time daily
- • Supervisors not reviewing/approving
- • Time charged to wrong contract
- • Missing total time accountability
Unallowable Costs Charged
- • Entertainment expenses
- • Alcohol
- • Lobbying costs
- • Executive compensation over caps
Indirect Rate Issues
- • Improper allocation bases
- • Missing documentation
- • Inconsistent treatment year-to-year
- • Wrong costs in pools
Documentation Gaps
- • Missing receipts/invoices
- • No written policies
- • Inadequate cost segregation
- • Poor record retention
Frequently Asked Questions
Do all government contractors get audited?
No. DCAA primarily audits contractors with cost-reimbursement contracts. Firm-fixed-price contractors have minimal audit exposure.
What is the Incurred Cost Submission (ICS)?
Annual submission required within 6 months of fiscal year end for contractors with cost-type contracts. Reports actual costs incurred during the year.
What happens if my accounting system is inadequate?
You may not be awarded cost-type contracts until deficiencies are corrected. DCAA issues specific findings that must be addressed.
How long should I keep records?
Minimum 3 years after final payment, but 6-7 years is recommended. Some contracts have specific retention requirements.
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