What DCAA looks at
DCAA is an audit agency, not a regulator. It examines and reports; the contracting officer decides. Knowing which audit you are in, and what it is testing, is most of what makes one manageable.
The audits you will see
| Audit | When | What it tests |
|---|---|---|
| Preaward accounting system survey (SF 1408) | Before award of a cost-type contract | Whether the system is designed to accumulate and segregate cost as required, and whether it is in operation. |
| Post-award accounting system audit | After award, on DoD work with the business systems clause | Compliance with the 18 criteria in DFARS 252.242-7006, in operation rather than on paper. |
| Labor evaluation — floor check | Unannounced | Whether employees record their own time, daily, to the right cost objective. |
| Incurred cost audit | After the annual submission | Whether claimed costs are allowable, allocable, and reasonable, and whether the rates compute correctly. |
| Provisional billing rate review | Annually or on change | Whether the proposed rates approximate expected final rates net of unallowables. |
| Price proposal audit | On larger proposals | Whether proposed cost is supported and consistent with your disclosed practices. |
What gets requested
The notification letter typically asks for some subset of:
- Written accounting policies and procedures, and the timekeeping policy.
- Chart of accounts with account descriptions.
- Trial balance and financial statements for the period.
- Job cost reports and the reconciliation to the general ledger.
- Indirect rate calculations with pool and base detail.
- Timekeeping records and labor distribution reports.
- Payroll registers and tax filings.
- Copies of contracts, modifications, and the clause lists.
- Billing history by contract, cumulative.
- The unallowable cost accounts and your screening procedure.
- An organization chart and a description of the internal control environment.
Every audit draws from the same pile. A contractor who can produce it in two days has a different experience from one who takes three weeks — before anyone has looked at a number.
How to handle one
- Name one point of contact. Every request and every answer routes through that person, and every document provided is logged.
- Answer what was asked. Volunteering adjacent material expands scope.
- Answer in writing where the question is substantive, so the record is yours as well as theirs.
- Prepare staff for interviews. Not scripting — they should say what they actually do — but nobody should be surprised by the questions.
- Fix what you find. If a request surfaces a real problem, correct it and document the correction rather than waiting to see whether it is noticed.
- Respond to the draft report. You get an opportunity to comment before it is issued, and comments become part of the record the contracting officer reads.
Findings and what follows
A significant deficiency is a shortcoming that materially affects the government's ability to rely on the information your system produces. On DoD contracts carrying DFARS 252.242-7005, a final determination that a business system is inadequate allows the contracting officer to withhold a percentage of payments until the deficiencies are corrected.
Findings also persist. They surface in the next preaward survey, in the incurred cost audit, and in diligence if you ever sell the company. Correcting a finding properly — with a written corrective action plan and evidence the correction is operating — is worth more than arguing it.
Frequently asked
Does DCAA audit every government contractor?
No. Audit coverage is risk-based and concentrated on cost-reimbursable work. A contractor with only firm-fixed-price contracts may never see DCAA. Cost-type work brings the accounting system, labor, and incurred cost audits with it.
How much notice do we get?
System and incurred cost audits come with a notification letter and a document request, usually with a few weeks of lead time. Floor checks are unannounced by design.
What is a significant deficiency?
A shortcoming in the system that materially affects the government's ability to rely on the information it produces. On DoD contracts with the business systems clause, it can lead to payment withholding until corrected.
Should we have someone represent us during an audit?
For a first accounting system audit or a first incurred cost audit, having someone who has been through them manage the document flow and the responses generally shortens the audit and reduces findings. Day-to-day, the more useful investment is keeping the records in a state where the audit is uneventful.
Related
What an adequate GovCon accounting system has to do
The 18 accounting system criteria in DFARS 252.242-7006, what SF 1408 checks before award, and the small number of things that actually decide whether a system passes.
Read →DCAA-compliant timekeeping
What a compliant timekeeping system requires, how labor distribution ties to the general ledger, and what happens in a floor check.
Read →The incurred cost submission
Who has to file, the six-month deadline under FAR 52.216-7, the ICE model schedules, and the deficiencies that get submissions returned.
Read →