Government Contract Audit Preparation: Complete Contractor Guide

Introduction

Government contractors are subject to audits that verify compliance with contract terms, proper cost accounting, and adherence to regulations. Preparation is key—well-organized records and established procedures make audits smoother and reduce adverse findings.

This guide covers the types of audits government contractors face, documentation requirements, and best practices for audit preparation.

Why Audit Readiness Matters

Protects contract payments and final billing
Demonstrates contractor responsibility
Supports future contract eligibility
Reduces time and cost of audit process
Prevents adverse findings and disputes

Types of Audits

Different audits examine different aspects of your government contracting activities.

Pre-Award Audits

Review of pricing proposal accuracy
Accounting system adequacy
Cost estimating procedures
Conducted before contract award

Incurred Cost Audits

Review of costs charged to contracts
Required for cost-reimbursement contracts
Verify costs are allowable, allocable, reasonable
Annual submission and periodic audit

Progress Payment Audits

Verify progress payment requests
Confirm work completion claims
Review percentage complete calculations

Compliance Audits

Audit Type	Focus
Davis-Bacon/Prevailing Wage	Wage rate compliance, certified payroll
EEO/Affirmative Action	Employment practices, subcontracting
Small Business Subcontracting	Compliance with subcontracting plan
Safety/OSHA	Safety program compliance

Documentation Requirements

Complete, organized documentation is essential for successful audits.

Financial Records

General ledger and trial balance
Job cost reports by contract
Payroll records and timesheets
Invoices and payment records
Bank statements and reconciliations
Equipment records and depreciation schedules

Contract Records

Contract and all modifications
Correspondence with owner
Change orders and documentation
Subcontracts and purchase orders
Progress schedules and updates
Meeting minutes and site logs

Compliance Records

Certified payroll reports
EEO documentation
Small business subcontracting reports
Safety documentation and training records
Insurance certificates

Retention Requirements

Federal contracts require record retention for:

3 years after final payment (general rule)
Longer for indirect cost records
Longer if claims or disputes pending
Check specific contract requirements

Accounting System Requirements

Government contracts may require specific accounting system capabilities.

Adequate Accounting System

A DCAA-adequate accounting system must:

Segregate direct and indirect costs
Accumulate costs by contract
Exclude unallowable costs
Provide timely, accurate data
Support billing and cost claims
Maintain audit trail

Cost Accounting Standards (CAS)

Larger contracts may require CAS compliance:

Modified CAS coverage for most contracts
Full CAS coverage for large contractors
Disclosure statement requirements
Consistent cost accounting practices

Timekeeping Requirements

Daily time recording by employee
Charges to specific contracts/tasks
Supervisor approval
Support for labor costs charged

Audit Preparation Steps

Proactive preparation makes audits smoother and faster.

Ongoing Preparation

Maintain organized records from project start
Conduct internal audits periodically
Address issues immediately when discovered
Keep documentation current, not behind
Train staff on requirements

When Audit is Announced

Review audit scope and information requests
Gather requested documents
Review records for completeness
Identify potential issues proactively
Designate audit coordinator
Brief relevant staff

Pre-Audit Checklist

☐ All requested documents gathered
☐ Documents organized and indexed
☐ Supporting calculations verified
☐ Audit workspace prepared
☐ Staff availability confirmed
☐ Key contacts identified

During the Audit

Professional conduct during audits helps ensure fair evaluation.

Best Practices

Be cooperative and professional
Respond to requests promptly
Answer questions accurately
Don't volunteer unnecessary information
Keep track of documents provided
Take notes on discussions

Managing the Process

Establish single point of contact
Schedule regular status meetings
Address questions timely
Discuss findings as they arise
Request explanations for concerns

Responding to Findings

Review draft findings carefully
Provide supporting documentation for disputes
Respond in writing within timeframes
Escalate significant disagreements appropriately

Common Audit Findings

Understanding common findings helps you avoid them.

Cost-Related Findings

Unallowable costs charged to contracts
Costs not properly allocated
Missing or inadequate documentation
Indirect cost calculation errors
Duplicate charges

Timekeeping Findings

Time not recorded daily
Missing supervisor approvals
After-the-fact corrections
Inconsistent with other records

Compliance Findings

Prevailing wage violations
Subcontracting plan non-compliance
Missing certifications
Incomplete records

Frequently Asked Questions

How long do government audits take?

Varies widely—from days for simple audits to months for complex incurred cost audits. Preparation level and responsiveness significantly affect duration. Well-organized records can substantially reduce audit time.

What if I disagree with audit findings?

You have the right to respond to draft findings with additional documentation or explanations. For DCAA audits, disagreements can be escalated to higher levels. Consult with your contracting officer and consider legal counsel for significant disputes.

Are all government contractors audited?

Not all contractors are audited, but all should be prepared. Cost-reimbursement contractors face more scrutiny. Fixed-price contractors may be audited for progress payments, compliance, or specific issues.

Can poor audit results affect future contracts?

Yes. Significant findings may affect your responsibility determination for future contracts. Repeated issues with accounting systems or compliance can result in suspension or debarment in extreme cases.

Conclusion

Audit readiness is an ongoing responsibility, not a one-time effort. Maintain organized records, establish compliant systems, and address issues promptly. The investment in proper documentation pays dividends when audits occur.

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