When Is a DCAA Audit Required for Government Contractors?

The Defense Contract Audit Agency (DCAA), operating under the Department of Defense, provides audit and financial advisory services for contract acquisition and administration to the Department of Defense and other federal agencies. The DCAA ensures taxpayer funds are used appropriately by verifying the accuracy and compliance of contractor financial data. This oversight determines if reported contract costs are allowable, allocable, and reasonable. Understanding when DCAA audits are required is important for any entity seeking or performing government contract work.

Triggers for Pre-Award Audits

DCAA audits are often required before a government contract is awarded, primarily to assess a contractor’s financial systems and proposed costs. These pre-award audits are particularly relevant for cost-reimbursable contracts, including cost-plus-fixed-fee (CPFF), cost-plus-award-fee (CPAF), and certain time and materials (T&M) contracts. The audit ensures the contractor can properly account for contract costs before any funds are released.

A key aspect of pre-award scrutiny involves the contractor’s accounting system. The DCAA assesses whether the system is adequate for handling government contract requirements, including the proper segregation of direct costs from indirect costs and unallowable expenses. An acceptable accounting system must also maintain costs under general ledger control and produce financial statements in accordance with Generally Accepted Accounting Principles (GAAP).

Dollar thresholds also play a role in triggering pre-award reviews, particularly concerning Certified Cost or Pricing Data. This data is required for negotiated prime contracts expected to exceed $2 million, as outlined in FAR Part 15. The DCAA may audit these proposals to verify the accuracy, completeness, and currency of the submitted cost or pricing data. A contractor’s estimating system may also undergo a pre-award review. This audit ensures that the contractor’s policies and practices for generating cost estimates are reliable and produce supportable data for price negotiations.

Triggers for Post-Award Audits

Once a government contract has been awarded, various situations necessitate DCAA audits to ensure ongoing compliance and proper cost management. One common type is the incurred cost audit, required annually for contractors holding flexibly-priced contracts like cost-reimbursable or time and materials (T&M) agreements. Contractors must submit an incurred cost proposal within six months of their fiscal year-end. The DCAA reviews this to verify that actual costs incurred are reasonable, allowable, and allocable, helping reconcile estimated billing rates with actual costs.

As contracts near completion or for final payment, contract closeout audits may be required. These audits inspect the final costs to ensure that all expenses charged to the government are reasonable and allowable under the contract terms. DCAA may also conduct audits when a contractor submits claims, such as those for equitable adjustment or requests for payment of costs that might be considered unallowable. Such claim audits scrutinize the justification and documentation supporting the contractor’s assertions.

Beyond specific cost submissions, DCAA conducts ongoing or periodic system audits post-award to ensure continued compliance and effectiveness of a contractor’s business systems. These include reviews of accounting, purchasing, material management, and labor systems. A post-award accounting system audit determines if the contractor’s system complies with relevant regulations, such as DFARS 252.242-7006.

The DCAA also performs unannounced timekeeping floor checks to verify the accuracy of labor records and compliance with timekeeping policies. Special audits can be triggered by specific concerns, investigations, or direct requests from contracting officers or other government agencies, focusing on potential risk or non-compliance.

Factors Influencing DCAA Audit Scope and Frequency

Several conditions influence whether a DCAA audit is required, its frequency, and its overall scope, beyond immediate triggers. The value and complexity of a government contract are key considerations; higher dollar value contracts and those with intricate structures are more likely to necessitate DCAA oversight. Cost-reimbursable contracts, for example, result in at least one type of DCAA audit due to the inherent risk associated with reimbursing actual costs.

The approval status of a contractor’s business systems, such as their accounting, estimating, and purchasing systems, directly impacts the likelihood and depth of future audits. An adequate and approved system can lead to fewer detailed transactional audits, providing assurance regarding the contractor’s internal controls and financial processes. Conversely, known deficiencies or a lack of system approval can increase the frequency and intensity of DCAA reviews.

DCAA employs a risk-based approach to determine its audit priorities. Factors increasing perceived risk include a contractor’s past performance, prior audit findings, and financial health. Red flags that can trigger an audit include inconsistent accounting records, non-compliance with timekeeping policies, inability to provide adequate document traceability, or inclusion of unallowable costs. The nature of costs incurred, such as high-risk subcontracts or executive compensation, can also elevate the risk profile.

Regulatory requirements within the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement (DFARS) also mandate certain audits or system reviews based on contract type, value, or specific contractor characteristics. These regulations establish the framework for compliance and the government’s right to audit. Contracting officers or other government agencies can also directly request DCAA audits based on their specific needs or concerns related to a contractor’s performance, costs, or perceived irregularities. These requests often stem from a need for independent assurance to support contract decisions or address potential issues.