DCAA Audit: Complete Guide for U.S. Government Contractors

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A DCAA Audit is a formal financial and accounting review conducted by the Defense Contract Audit Agency (DCAA), a U.S. Department of Defense (DoD) agency. Its purpose is to ensure that government contractors comply with Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS), and other federal cost principles when doing business with the U.S. government.

For defense contractors, federal suppliers, and government service providers, passing a DCAA audit is not optional, it is essential for winning contracts, receiving payments, and maintaining eligibility for future federal work.

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^{What Is a DCAA Audit?}

A DCAA audit is an independent examination of a contractor’s accounting system, financial records, labor charging practices, and internal controls. The audit ensures that:

• Costs billed to the U.S. government are allowable, allocable, and reasonable
  
  
• Accounting systems comply with FAR Part 31
• Labor hours are accurately recorded
  
  
• Indirect cost rates are properly calculated
  
  
• Government funds are protected from misuse
  
  

DCAA audits are commonly required before contract award, during contract performance, and after contract completion.

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^{Who Needs a DCAA Audit?}

A DCAA audit is required for any business that:

• Contracts with the U.S. Department of Defense
  
  
• Works as a prime contractor or subcontractor
  
  
• Bills the government on a cost-reimbursable, time-and-materials, or labor-hour contract
  
  
• Plans to bid on federal contracts requiring an adequate accounting system

Industries commonly subject to DCAA audits include:

• Defense and aerospace
  
  
• Government IT services
  
  
• Engineering and construction
  
  
• Cybersecurity and intelligence services
  
  
• Professional and technical consulting
  
  

Even small businesses and startups bidding on their first government contract may be subject to a DCAA audit.

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^{Types of DCAA Audits}

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Understanding the different DCAA audit types helps contractors prepare properly.

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1. Pre-Award Accounting System Audit

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Evaluates whether your accounting system is adequate before contract award.

Key focus areas:

• Segregation of direct and indirect costs
  
  
• Timekeeping system compliance
  
  
• Job cost accounting
  
  

This is one of the most critical audits for new government contractors.

^{2. Incurred Cost Audit (ICE)}

Reviews actual costs claimed during the fiscal year.

Key focus areas:

• Allowability of costs
  
  
• Indirect rate calculations
  
  
• Supporting documentation
  
  

Failure here can result in cost disallowances and repayment demands.

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^{3. Forward Pricing Rate Audit}

Evaluates projected costs and pricing proposals.

Used to:

• Validate cost realism
  
  
• Prevent inflated pricing
  
  

^{4. Labor Floor Check}

Unannounced audit to verify:

• Employees are present
  
  
• Timekeeping records are accurate
  
  

Improper labor charging is one of the most common DCAA violations.

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^{5. Closeout Audit}

Conducted at the end of a contract to finalize costs and payments.

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^{Key Areas Reviewed in a DCAA Audit}

A DCAA audit typically examines:

• Accounting system adequacy
  
  
• Timekeeping policies and employee compliance
  
  
• Labor distribution reports
  
  
• Indirect cost pools (G&A, overhead, fringe)
  
  
• Expense allowability under FAR
  
  
• Internal controls and segregation of duties
  
  
• Payroll records and labor authorizations
  
  
• Subcontractor cost verification
  
  

Every cost charged to the government must be traceable, documented, and justified.

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^{DCAA Accounting System Requirements}

To pass a DCAA audit, your accounting system must:

• Segregate direct vs indirect costs
  
  
• Accumulate costs by contract
  
  
• Maintain uncompensated overtime tracking (if applicable)
  
  
• Use consistent cost allocation methods
  
  
• Support billing with detailed source documentation
  
  

Many contractors fail audits due to improper system setup, not fraud.

^{Common DCAA Audit Findings}

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Based on real-world audit outcomes, common issues include:

• Inadequate timekeeping controls
  
  
• Employees completing timesheets in advance
  
  
• Lack of written accounting policies
  
  
• Misclassification of indirect costs
  
  
• Unsupported expense claims
  
  
• Weak internal controls
  
  

Even minor documentation gaps can lead to audit failures or delayed approvals.

^{How to Prepare for a DCAA Audit}

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^{1. Conduct a Mock DCAA Audit}

A pre-audit review helps identify gaps before the official audit.

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^{2. Implement Written Policies}

Document policies for:

• Timekeeping
  
  
• Labor charging
  
  
• Expense reimbursement
  
  
• Cost allocation
  
  

^{3. Train Employees}

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Employees must understand DCAA rules, especially timekeeping compliance.

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^{4. Use DCAA-Compliant Accounting Software}

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While DCAA does not “certify” software, systems must support:

• Job costing
  
  
• Audit trails
  
  
• Cost segregation
  
  

^{5. Work With DCAA Compliance Experts}

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Experienced CPAs and compliance advisors help avoid costly mistakes.

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^{Consequences of Failing a DCAA Audit}

Failing a DCAA audit can result in:

• Contract award delays
  
  
• Withheld payments
  
  
• Cost disallowances
  
  
• Contract termination
  
  
• Increased audit frequency
  
  
• Loss of government contracting eligibility
  
  

Early compliance is far less expensive than post-audit remediation.

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^{Why DCAA Compliance Requires Specialized Expertise}

DCAA audits are highly technical and governed by evolving federal regulations. General accounting knowledge is not enough. Contractors benefit from advisors with:

• Direct DCAA audit experience
  
  
• Deep FAR and CAS knowledge
  
  
• Government contracting specialization
  
  
• Proven audit defense strategies
  
  

This expertise strengthens compliance, credibility, and long-term contract success.

^{Frequently Asked Questions (FAQs)}

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Is a DCAA audit mandatory?

Yes, for most cost-type and time-based federal contracts.

How long does a DCAA audit take?

Anywhere from a few weeks to several months, depending on audit scope.

Can small businesses pass a DCAA audit?

Yes, size does not exempt companies from compliance requirements.

Does DCAA approve accounting software?

No, but your system must meet DCAA functional requirements.

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^{Final Thoughts: Why DCAA Audit Readiness Matters}

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At CP Charles CPA, we bring deep experience in DCAA audit preparation, FAR compliance, and government contractor accounting. Our team works closely with U.S. contractors to identify risks early, implement DCAA-compliant systems, and confidently navigate audits with clarity and control. Whether you are preparing for your first pre-award audit or responding to ongoing DCAA scrutiny, having the right advisory partner can make all the difference.

With proactive planning and expert guidance, DCAA audits become manageable, not disruptive. CP Charles CPA is committed to helping government contractors stay compliant, audit-ready, and positioned for sustainable growth in the federal marketplace.

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