Understanding what a DCAA audit is and why it matters is critical for any contractor working with the Department of Defense (DoD). A DCAA audit evaluates whether your financial and accounting practices, including processes and internal controls, are compliant with the strict standards required for government contracts. These audits confirm taxpayer dollars are spent properly, and they determine your eligibility for future awards. If you want to win, keep, and grow federal contracts, mastering DCAA compliance is non-negotiable and can be a prohibitive barrier to entry for those that don’t understand their important role.

What Is a DCAA Audit?

A DCAA audit is a formal review performed by the Defense Contract Audit Agency to verify that your accounting system and cost practices align with the Federal Acquisition Regulation (FAR) compliance and Cost Accounting Standards (CAS), as applicable. These audits confirm that contractors are handling government funds responsibly and accurately.

DCAA auditors examine areas such as:

• How your accounting system tracks direct and indirect costs
• The structure of your labor and timekeeping processes
• The accuracy of billing and cost reports
• Whether internal controls are documented and followed
• How your indirect rates are calculated
• How you prepare cost estimates for U.S. Government proposals

These reviews help the government determine whether your company is trustworthy, compliant, and ready for DoD contract work.

Why the DCAA Exists

The purpose of the DCAA is simple: safeguard taxpayer dollars. As part of the DoD, the agency reviews contractor financials to prevent fraud, waste, and misuse of funds. While the DCAA does not award or deny contracts directly, its findings influence contracting officers’ decisions. A contractor with a strong audit history will always have a competitive advantage.  Contracting Officers rely heavily (in some cases, exclusively) on DCAA’s opinion when it comes to the readiness of a contractor to comply with its contractual obligations. 

The Main Types of DCAA Audits

Contractors encounter different kinds of DCAA audits depending on where they are in the government contracting lifecycle.

Incurred Cost Audits

These audits evaluate the allowability, allocability, and reasonableness of the costs you’ve charged the government during the year. DCAA reviews your indirect rate calculations, cost pools, and supporting documentation to confirm your annual Incurred Cost Submission (ICS) is complete, accurate, and compliant.

Accounting System Audits

DCAA examines whether your accounting system meets the criteria required for government contracting. Auditors evaluate cost segregation, timekeeping controls, indirect rate structures, billing capability, and audit trails. A compliant system is essential for cost-type and progress-billing contracts.

Estimating System Audits

These audits assess the accuracy and reliability of your cost estimating processes. DCAA determines whether your estimating system produces consistent, supportable, and well-documented proposals. Weak estimating practices often lead to questioned costs or negotiating disadvantages.

CAS (Cost Accounting Standards) Audits

CAS audits determine whether your cost accounting practices align with the Cost Accounting Standards. DCAA reviews the consistency of your cost allocation methods, changes in accounting practices, and compliance with disclosure statements. CAS noncompliance can result in costly penalties.

Proposal Audits

These audits focus on the pricing proposals you submit for new or ongoing contracts. DCAA evaluates your cost buildup, labor assumptions, bill of materials, subcontracting costs, and indirect rates to ensure your pricing is fair, reasonable, and well-supported.

Truthful Cost or Pricing (“TINA”) / Defective Pricing Audits

Under the Truthful Cost or Pricing Act, contractors must provide current, accurate, and complete data during negotiations. DCAA audits proposals after award to determine whether undisclosed or inaccurate data led to inflated contract prices. Findings can result in refunds, interest, and penalties.  As a point of reference, defective pricing audits are one of the highest reported areas of “Return on Investment” (ROI) by DCAA each and every year in its annual report to Congress.

Forward Pricing Rate Audits

These audits review your forecasted indirect rates for upcoming periods. DCAA analyzes the assumptions, methodologies, and supporting documentation used in your forward pricing rate proposal (FPRP). These rates heavily influence contract negotiations and multiyear pricing strategies.

Provisional Billing Rate Audits

DCAA reviews the provisional billing rates you use to invoice the government throughout the year. These audits assess whether your billed indirect rates are reasonable, properly supported, and aligned with expected actual rates to prevent overbilling or significant year-end adjustments.

Other Audits

The DCAA also performs special audits such as timekeeping floor checks, labor verifications, cost-reimbursable review procedures, and other compliance evaluations depending on contract type and risk level.

What DCAA Auditors Look For

DCAA auditors follow a strict framework designed to verify that costs charged to the government are accurate, allowable, and supported by a compliant accounting system. Their goal isn’t just to review your numbers, but to confirm your internal controls, timekeeping practices, and documentation processes consistently align with applicable FAR and CAS requirements.

This becomes especially important when a contractor starts work under an Undefinitized Contract Action, where cost tracking, documentation, and billing discipline matter from day one.

Understanding what they focus on helps you prepare proactively, avoid costly audit findings, and maintain a strong compliance record that protects your eligibility for future government contracts.

Timekeeping Accuracy

Labor is often the largest cost charged to a contract, so DCAA expects:

• Daily time entry
• Supervisor approval
• Accurate project classification
• Strict adherence to procedures

Any inconsistency signals poor internal controls and quickly becomes an audit finding.

Cost Classification

Contractors must demonstrate that they consistently separate:

• Direct vs. indirect costs
• Allowable vs. unallowable costs

Even a single misclassified expense can lead to questioned costs or disallowed charges.

Documentation and Audit Trails

Every number must be supported by reliable documentation. DCAA expects clear, traceable records for:

• Timesheets
• Purchase orders
• Receipts
• Subcontracts
• Travel and expense reports

If backup documentation is missing, auditors may deny the cost—even if it was legitimate.

Internal Controls

Controls must be clearly written and consistently followed. This includes documented processes for:

• Labor charging
• Billing
• Cost accounting practices
• Procurement approvals
• Expense authorization

A contractor with weak internal controls is at high risk for adverse audit findings.

How to Stay Fully “DCAA Compliant”

It’s important to note that there is no such thing as “DCAA Compliant”.  This is an oft-used industry term, but not something defined in FAR.  DCAA auditors evaluate whether a contractor is compliant, in their opinion, with applicable FAR requirements.  Their findings are reported to Contracting Officers, who have the ultimate authority on whether they agree or disagree with findings.  All that said, Contracting Officers rely heavily on DCAA and more often than not side with DCAA.  As such, it feels like passing a DCAA audit makes one “DCAA Compliant”.  To satisfy DCAA in its audit requires consistent systems, not last-minute scrambling before an audit. Below are some essential steps to maintain readiness year-round.

Strengthen Your Accounting Infrastructure

Use an accounting system capable of:

• Segregating cost pools
• Tracking labor by contract
• Maintaining unalterable audit trails

The right system makes passing audits dramatically easier.

Train Your Team Regularly

Every employee must understand timekeeping rules, labor charging expectations, and the consequences of inaccuracies. Ongoing training keeps your processes clean and audit ready.

Maintain Updated Written Policies

Your policies should reflect what you actually do, not what you used to do. Keep your SOPs current for labor, procurement, billing, and record-keeping so auditors see consistency between procedures and practice.

Prepare ICS Early and Carefully

ICS preparation should begin well before the deadline. Accurate schedules, complete documentation, and properly calculated rates are essential for a smooth audit.

Leverage Government Contract Accounting Experts

Many contractors choose to outsource DCAA compliance, ICS preparation, and ongoing accounting system maintenance. Expert guidance not only reduces audit risk but frees your internal team to focus on contract performance.

Get Proven DCAA Audit Support From Experts Who Know the Process

DCAA audits are complex, time-consuming, and unforgiving, especially if your accounting system, timekeeping, or documentation isn’t structured exactly the way auditors expect. You don’t need to face that pressure alone. RKI Accounting provides specialized DCAA audit support that prepares your systems, strengthens your controls, and makes sure every cost you claim stands up to scrutiny.

Whether you’re preparing for a pre-award SF 1408 review, navigating a post-award audit, responding to questioned costs, or gearing up for your next Incurred Cost Submission, our team knows how to keep you compliant and audit-ready all year long.

If you want fewer findings, cleaner documentation, and the confidence to pass any DCAA audit, we’re ready to help. Request a consultation to schedule expert DCAA audit support and protect your contracts with a fully compliant, audit-ready foundation.

In a significant move aimed at streamlining oversight and improving audit outcomes, the Defense Contract Audit Agency (DCAA) recently announced a major reorganization. This DCAA reorganization is one of the most impactful shifts in recent years and is already changing how contractors interact with DCAA.

If you're a government contractor or involved in defense contracting compliance, this update matters. At RKI, we specialize in helping businesses stay ahead of DCAA changes, and this one is worth paying attention to.

Overview:

• Key goals and structure of the new DCAA reorganization

• How the changes affect government contractors and audit processes

• Expected impacts on current and future audits

• Actionable steps contractors can take to prepare

• How RKI supports businesses through DCAA compliance and audit readiness

What Is the New DCAA Reorganization?

According to the official DCAA announcement, the agency is restructuring its leadership and operational model. The goal? To provide faster, more effective audit support while adapting to the evolving needs of defense contractors.

This reorganization includes:

• Realignment of regional audit offices under a new organizational structure
• Enhanced collaboration between audit teams and contracting officers
• Streamlined communication channels for contractors
• More consistent application of DCAA audit programs across geographic areas

DCAA Director Terri Dilly stated that this reorganization reflects “a proactive approach to evolving audit needs, aligning our resources to ensure optimal oversight.”

Why Does This Matter to Government Contractors?

For contractors navigating the world of DCAA audit support, these changes could mean a more predictable audit process, but also new challenges in adapting to updated expectations.

The DCAA reorganization aims to:

• Increase audit efficiency
• Reduce audit backlog
• Improve consistency in audit findings
• Support better communication with contracting officers

However, as with any structural shift, government contractors must be aware of how these updates might influence existing or upcoming audits, incurred cost submissions, or accounting system reviews.

What Changes Should You Expect in DCAA Audits?

While impossible to know exactly what outcomes to expect, below are some high-level expectations we’re preparing for:

• High turnover of your audit team, whether by termination or simply re-organization
• Expedited closure of current audits with an aim to close as many audits with current teams prior to transition
• New audit relationships, for better or worse
• Commonality in findings within the Air, Sea, and Land groups. The re-organization around Air, Sea, and Land offers the opportunity for auditors to have clients in a common industry, which may lend itself to better ‘apples to apples’ audits on contractors; hence more common findings and positions
• Improved use of technology on audits (as intended)

The overall conclusion is that you’re likely to get new auditors with renewed audit interest.  A fresh look at which audits you’re due for can be very helpful to anticipating when auditors may arrive.  Explore our DCAA support services to ensure you’re ready for what’s next.

How Contractors Should Prepare

Here’s how your team can stay prepared:

1. Stay Current with DCAA News: Subscribe to updates from DCAA’s Newsroom.
2. Update Internal Policies: Review and adapt accounting policies to align with updated audit expectations.
3. Conduct a Readiness Review: Engage a DCAA expert like RKI to assess your current systems and documentation.
4. Be Proactive: Don't wait for an audit notice, start implementing compliance improvements now.

How RKI Can Help

At RKI, we keep a close watch on DCAA news to make sure our clients are prepared for anything. Whether you're a small business entering the government space or a seasoned defense contractor, our team can guide you through:

• DCAA audit readiness reviews
• Incurred cost proposal support
• Accounting system compliance
• Post-award audit support

We act as your trusted partner throughout the entire process, minimizing risk and ensuring compliance so you can focus on what matters most, winning contracts and growing your business.

Stay Ahead of the DCAA Reorganization

The new DCAA reorganization marks a shift in how government audits are conducted, and preparation is key. By understanding the changes and aligning your systems now, you'll position your company for success in this new audit landscape.

Need guidance on how this reorganization could impact your business? Contact us today to schedule a consultation.

A pre-award accounting system audit is an evaluation of the design of your accounting system for the award of cost-type contracts, including Cost-plus-fixed-fee and Time & Materials (T&M). An adequate accounting system is required pursuant to FAR 16.104:

(i)  Adequacy of the contractor's accounting system. Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type.

What is SF 1408?

DCAA, and prime contractors alike, us the Standard Form SF-1408 to evaluate if a contractor’s accounting system is adequate for the award of these types of contracts. Without an adequate accounting system that passes the criteria in the SF-1408, a contractor will not be able to compliantly perform under cost-type contracts so it’s critical that a contractor understand the criteria, and how to demonstrate compliance with the criteria.

The Standard Form 1408 (SF1408), otherwise known as the Pre-Award Accounting System Survey, or Pre-Award Accounting System Adequacy Checklist, is a checklist used by Defense Contract Audit Agency (DCAA) auditors in the performance of a “pre-award audit”. The “pre-award audit” is technically a review and not a true audit because it does not look at any actual costs, rather it determines whether the design of a contractor’s accounting system is “adequate”

The SF1408 is usually a self-certification that documents the contractor’s accounting system adequacy and is used by DCAA during its Accounting S

system Review, but in some cases, it can be utilized by a third-party CPA to issue a determination of acceptability. It should be noted, however, that acceptance of a third-party CPA’s determination by the Federal customer is usually stated explicitly within the solicitation.

SF1408 Criteria

The SF1408 criteria requires that a contractor be able to demonstrate the following:

•  Proper segregation of direct costs from indirect costs; Identification and accumulation of direct costs by contract;
•  A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives;
•  Accumulation of costs under general ledger control;
•  A timekeeping system that identifies employees’ labor by intermediate or final cost objectives;
•  A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;
•  Interim (at least monthly) determination of costs charged to a contract through routine posting to books of account;
•  Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR part 31 or other contract provisions;
•  Identification of costs by contract line item (CLIN) and by units (as if each line item or unit was a separate contract) if required by the proposed contract; and
•  Segregation of preproduction costs from production costs (manufacturing only).

That readiness matters even more when a contractor is considering an Undefinitized Contract Action.

What if a Contractor Does Not Meet the SF1408 Criteria?

If a contractor cannot demonstrate it maintains an “adequate accounting system”, it may be denied the award or required to correct the deficient elements prior to reconsideration. If a contractor has been awarded a Federal contract and cannot pass an Accounting System Audit, DCAA can suspend the contract until the deficiencies are resolved.

As such, it is always in a contractor’s best interest to proactively conduct and submit an SF1408 if it plans to bid on a cost-reimbursable award, or show proof of a previous determination of an “acceptable accounting system”. If gaps within the accounting system have been identified during the process, the contractor should include a detailed plan with implementation date for bringing its system into compliance.

What is the Difference Between a Pre-Award Accounting System Audit and a Post Award Accounting System Audit?

A lot! A pre-award accounting system audit evaluates the design of the accounting system, namely that it can collect costs at the project level and has sufficient cost accounting set-up with policies to demonstrate it is capable of properly invoicing under cost-type awards. A post award accounting system audit tests the operating effectiveness of the system, specifically evaluating transactions that run through the accounting system. They are entirely different audit programs:

Pre-Award Accounting System Audit Program: 17740 Preaward Survey of Prospective Contractor Accounting System AP (dcaa.mil)

Post-Award Accounting System Audit Program: 11070 Compliance with DFARS 252.242-7006 Accounting System Administration Requirements Audit AP (dcaa.mil)

Need Assistance?

Navigating a DCAA audit can be a complex and challenging process, and ensuring that your accounting system is audit-ready is crucial for success. Whether you're seeking assistance with supporting an ongoing DCAA audit or evaluating the preparedness of your accounting system for an upcoming audit, our expert team is here to guide you. We specialize in providing comprehensive support, from assessing compliance with DCAA requirements to implementing necessary adjustments in your accounting practices.

The Defense Contract Audit Agency (DCAA) maintains multiple audit programs to monitor and verify government contractor compliance.  DCAA audit programs may occur before, after, or during contract performance through Preaward Audits, Postaward Audits, and Contractor Business System Audits. DCAA is chartered with identifying and evaluating all activities that contribute to or impact proposed or incurred costs of Government contracts.

DCAA’s major areas of emphasis include: DFARS Business Systems such as Accounting Systems, Estimating Systems, and Purchasing Systems; management policies and procedures; accuracy of contractor forward pricing and incurred cost representations; adequacy and reliability of records and accounting systems; and contract compliance with contractual provisions having accounting or financial significance such as the FAR Cost Principles (FAR Part 31), the Cost Accounting Standards (CAS), and clauses pertaining to the Truth in Negotiations Act (TINA).

The timing of DCAA’s audit will depend on the risk profile of your organization and its contracts.  DCAA uses a variety of risk assessment tools to determine which areas of regulatory risk warrant audit attention.  In addition, Contracting Officers have very broad discretion as to where audit resources should be deployed.

What Are DCAA Audit Programs?

DCAA audit programs are structured review processes designed to verify that contractors:

• Properly account for direct and indirect costs

• Only bill allowable, allocable, and reasonable expenses

• Maintain compliant accounting and business systems

• Follow Cost Accounting Standards (CAS) when applicable

Each program focuses on a different compliance area — and each has its own timing.

1. Incurred Cost Submission (ICS) Audits

When it happens: After you submit your annual Incurred Cost Proposal (due six months after your fiscal year-end).

The ICS audit verifies that the indirect rates and costs billed to the government are accurate and compliant with FAR Part 31.

If you hold cost-reimbursable contracts, this audit is common and expected.

Trigger: Annual incurred cost submission.

2. Accounting System Audits

When it happens: Typically before or shortly after receiving a cost-reimbursable or flexibly priced contract.

DCAA reviews whether your accounting system can:

• Segregate direct and indirect costs

• Accumulate costs by contract

• Produce reliable financial reports

• Prevent unallowable costs from being billed

An inadequate accounting system can delay awards or restrict contract types.

Trigger: Contract award or contracting officer request.

3. Forward Pricing & Proposal Audits

When it happens: During contract negotiations before award.

DCAA evaluates whether your proposed labor rates, indirect rates, and cost estimates are supported and reasonable.

This audit protects the government from overpricing.

Trigger: Submission of a negotiated cost proposal.

4. Business System Reviews (Including EVMS)

When it happens: When contracts meet certain dollar thresholds or include specific DFARS clauses.

Larger contractors may undergo reviews of systems such as:

• Earned Value Management Systems (EVMS)

• Estimating systems

• Purchasing systems

These audits ensure systems meet DoD compliance standards.

Trigger: Contract value thresholds or required clauses.

5. CAS Compliance Audits

When it happens: When a contractor becomes subject to Cost Accounting Standards (CAS).

DCAA reviews disclosure statements and accounting practices to confirm consistency and compliance with CAS requirements.

Trigger: CAS-covered contract award.

What Determines Audit Timing?

DCAA does not audit all contractors equally. Timing depends on:

• Contract type (cost-reimbursable contracts carry more scrutiny)

• Contract dollar value

• Risk profile

• Prior audit findings

• Submission deadlines (like ICS)

• Government priorities and workload

High-risk contractors or those with prior deficiencies often face more frequent reviews.

The Strategic Reality

DCAA audit programs are predictable. They follow contract events and compliance requirements.

Smart contractors prepare before triggers occur, not after receiving an audit notice.

That means:

• Establishing a compliant accounting system early

• Reviewing indirect rate structures

• Preparing documentation throughout the year

• Addressing internal control gaps proactively

Preparation reduces audit risk, speeds up approvals, and protects cash flow.

If you understand the programs and their timing, you move from reactive to strategic — and that changes everything.