DCAA Audit Prep: What to Expect and How to Be Ready
January 28, 2026
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The Defense Contract Audit Agency (DCAA) is responsible for auditing government contractors and ensuring they follow the financial and cost rules required for doing business with the Department of Defense (DoD). If your company happens to come under the watchful eye of DCAA, don’t fret! This is not an ambush.
A DCAA audit can be a walk in the park, provided you run a tight ship based on transparency and accountability. With clear processes, good documentation, and a calm liaison, the entire experience becomes routine and predictable. Remember, the difference between a quick,
painless audit and a costly, months-long ordeal really comes down to how well you prepare in advance.
This article will walk you through why DCAA audits matter, the different types of DCAA audits, and how to navigate said audits.
Why DCAA Audits Matter
A DCAA audit ensures government contractors comply with federal cost regulations, maintain adequate accounting systems, and bill the DoD accurately. Non-compliance during an audit presents significant financial risk. It may lead to disallowed costs, immediate repayment demands, payment delays, and even disqualification from future contracts. Thus, audit readiness is not optional but an essential imperative for maintaining business continuity.
Building a Strong Compliance Foundation
The DCAA places significant emphasis on the systems that generate transactions, because system weaknesses often result in unreliable transactions. If your system is flawed, every transaction processed through it may potentially be unreliable as well.
Every contractor must comply with the Federal Acquisition Regulation (FAR) and the Cost Accounting Standards (CAS). Let’s delve into what these regulations entail:
- The FAR Requirement
The FAR mandates that any cost billed to a government contract must satisfy three essential criteria, often referred to as AAR:
- Allowable:
The cost must comply with FAR Part 31 (Contract Cost Principles) and cannot fall under explicitly unallowable categories such as alcohol, entertainment, or lobbying. - Allocable:
The cost must be properly assigned to one or more cost objectives, such as contracts, projects, or indirect cost pools, in proportion to the benefit received. - Reasonable:
The cost must reflect what a prudent businessperson would pay under similar competitive and operational conditions. - In addition to being allowable, allocable, and reasonable, costs must comply with contract terms and any applicable CAS requirements.
- Allowable:
- CAS Applicability
The CAS mandates that contractors apply consistent, uniform accounting practices, especially regarding how costs are measured, assigned, and allocated. When your contract volume surpasses specific thresholds (generally $50 million in CAS-covered
awards, either from a single award or in aggregate, for full CAS coverage), you must submit a Disclosure Statement (Form CASB-DS-1 or DS-2) that outlines exactly how your costs are pooled and allocated. Once submitted, strict adherence is critical. Any deviation from the disclosed practices poses a significant audit risk.
Types of DCAA Audits
The DCAA performs several types of audits, and understanding the distinctions between them helps you prepare the right documentation:
- Pre-award accounting system audit: This type of audit assesses whether your accounting system is adequate for cost-type contracts. This audit typically uses the SF 1408 checklist as a baseline, supplemented by DCAA audit programs and system walkthroughs, focusing on the design and operation of your accounting processes, segregation of direct and indirect costs, and internal controls.
- Incurred cost audit: In this audit, auditors evaluate your indirect cost pools, allocation bases, and supporting documentation to reconcile provisional and final indirect rates.
- Timekeeping or labor charging audit: This audit examines whether employees’ hours are consistently recorded, approved, and charged consistently.
- Billing and invoicing audit: This audit verifies that billed costs comply with contract terms and are supported by invoices, receipts, and accounting records.
- Special audit: Special audits are conducted for targeted reviews, such as pricing, cost allowability, or internal controls. This is in response to specific risks or concerns.
Best Practices for Navigating a DCAA Audit
- Establish clear cost segregation and account mapping.
Develop a well-structured general ledger-to-cost-objective mapping that clearly distinguishes direct, indirect (overhead, general and administrative, fringe, bid and proposal), and unallowable costs. A clean structure makes tracing costs and meeting SF-1408 criteria much easier.
- Enforce daily timekeeping with strong segregation of duties.
Implement daily time entry, timely supervisory approval, and strict controls that prevent payroll administrators from altering timekeeping records unless it is done in accordance with a documented exception policy.
- Reconcile billings, payroll, and the general ledger regularly.
Reconcile interim billings, labor distribution journals, and payroll with your general ledger on a consistent schedule. Proactively resolve reconciling items to ensure a smooth audit.
- Maintain a centralized, searchable documentation library.
Store 12 to 24 months of supporting documentation in an indexed repository. This includes purchase orders, invoices, subcontracts, travel vouchers, signed timesheets, and statements of work. This practice comes in handy when DCAA traces individual transactions.
- Prepare a refined audit packet.
Assemble all key items such as SF-1408 (if relevant), accounting policies, indirect rate computations, applicable FAR/DFARS clauses, organizational structure, reconciliations, and the internal control system when required. A complete packet streamlines the audit and reduces back-and-forth.
- Be ICS ready.
Submit your Incurred Cost Submission (ICS) on time per FAR 52.216-7, remove unallowable costs from all pools, and prepare well-supported schedules. The DCAA evaluates adequacy before initiating the audit.
- Ensure proper segregation of duties and approvals.
Do not allow the same individual to approve time, process payroll, manage procurement, and post indirect allocations. Proper segregation reduces errors and protects against questioned costs.
DCAA Audit Prep Starts Before the Audit Notice Arrives
Our GovCon specialists help contractors build audit-ready systems, prepare SF 1408s and ICS submissions, and navigate DCAA requests with confidence.
DCAA audits focus on the strength of your accounting systems, cost segregation, and documentation. Gaps in FAR and CAS compliance can lead to questioned costs, payment delays, or lost contract opportunities.
- Appoint an audit liaison and maintain a request log.Designate a single point of contact to coordinate responses, manage supporting documentation, and track audit requests with dates and resolutions. This demonstrates control and responsiveness.
- Conduct mock audits and periodic internal reviews.Run a practice DCAA request list at least once to identify gaps. Continue routine internal checks on timesheet compliance, indirect rate reconciliations, and unallowable-cost screening to remain audit-ready year-round.
- Keep all records organized and available.Adhere to FAR Subpart 4.7 record retention requirements by maintaining records for at least three years after final payment. Ensure records are readily retrievable when requested by auditors.
Closing Thoughts on Being Audit-Ready
A DCAA audit doesn’t need to be nerve-wracking. With disciplined processes, accurate cost segregation, consistent timekeeping, and well-organized documentation, it becomes far more predictable and far less stressful. The more proactive you are, the fewer surprises you face. Remember that audit readiness isn’t just about passing DCAA scrutiny; it’s about building a system that protects your contracts, cash flow, and long-term viability as a government contractor.
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