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A cost reimbursement contract is a contract type commonly used in government and defense contracting where a contractor is reimbursed for allowable costs incurred, plus an additional fee. For organizations working with federal agencies, understanding how a cost reimbursement contract works is essential for compliance, profitability, and audit readiness.

At RKI, we frequently support contractors navigating cost-reimbursable environments, including FAR compliance, incurred cost submissions, and DCAA audit support. This guide breaks down what you need to know.

What Is a Cost Reimbursement Contract?

A cost reimbursement contract (also known as a cost reimbursable contract) is a contract structure in which the contractor is paid for allowable, allocable, and reasonable costs incurred during project performance, along with a fee or profit component.

In simple terms:

If you’ve ever asked, “What is a cost reimbursement agreement?” — it’s essentially the formal contract that defines how costs will be reimbursed, what qualifies as allowable, and how fees are calculated.

This structure is commonly used when:

The Federal Acquisition Regulation (FAR) outlines the rules governing cost-reimbursable contracts in federal projects (see FAR Part 16 – Types of Contracts).

Key Components of a Cost Reimbursement Agreement

A well-structured cost reimbursement agreement includes several critical elements:

  1. Allowable Costs

Costs must meet the standards of:

Terms of the contract Common reimbursable costs include:

Improper cost classification is one of the most common compliance issues we see during DCAA reviews. If your accounting system isn’t structured properly, reimbursement delays or audit findings can follow.

  1. Fee Structure

Unlike fixed-price contracts, profit in a cost reimbursement contract is typically defined as:

The chosen structure impacts cash flow, risk allocation, and compliance oversight.

  1. Funding Limitations

Most cost reimbursable agreements include a funding ceiling. Contractors must monitor expenditure carefully to avoid exceeding authorized funding without modification.

Failure to properly monitor funding can result in:

Strong job costing and real-time financial reporting are non-negotiable.

How a Cost Reimbursable Contract Impacts Your Accounting System

A cost reimbursable environment requires a far more sophisticated accounting infrastructure than fixed-price work.

You must have:

For federal contractors, this often means ensuring your system meets the criteria evaluated by DCAA during an accounting system audit. If you’re unsure where you stand, reviewing our guidance on DCAA audit expectations can help clarify expectations.

In some cases, contractors are asked to begin performance before final pricing and contract terms are fully negotiated. If that situation applies to you, our guide to Undefinitized Contract Actions explains how UCAs work, why they often function like cost-type contracts at the outset, and what contractors need to watch before definitization.

Without compliant systems in place, a cost reimbursement agreement can quickly become a liability instead of an opportunity.

Advantages of a Cost Reimbursement Contract

When structured and managed correctly, a cost reimbursement contract offers several advantages:

Reduced Pricing Risk

Since allowable costs are reimbursed, contractors face less risk from unforeseen cost increases.

Flexibility in Scope

These contracts are ideal for R&D or complex technical work where scope evolves.

Government Preference for High-Uncertainty Projects

Federal agencies often prefer cost reimbursable structures when outcomes are difficult to define upfront.

Disadvantages and Risks

Despite the benefits, cost reimbursement contracts carry compliance risk:

Heavy Documentation Requirements

You must maintain detailed records for:

Audit Exposure

Cost reimbursable contracts often trigger:

If your books aren’t ready, reimbursement delays or questioned costs are common.

Cash Flow Management Challenges

Reimbursement timing can create working capital strain if billing processes are inefficient.

If you’re preparing for an Incurred Cost Submission (ICS), proactive preparation is critical. You can review a detailed breakdown of the ICS process to better understand the steps, requirements, and common compliance considerations involved.

Fixed-Price vs. Cost Reimbursable Contracts

Understanding the distinction is essential:

Fixed-Price ContractCost Reimbursement Contract
Set priceReimbursement of actual costs
Higher contractor riskLower pricing risk
Less administrative burdenHigh compliance oversight
Profit depends on cost controlFee structure defined upfront

For contractors new to government work, jumping into a cost reimbursable agreement without proper accounting controls is a common mistake.

When Should You Use a Cost Reimbursement Agreement?

A cost reimbursement contract makes the most sense when:

However, before pursuing this contract type, evaluate:

  1. Is your accounting system compliant?
  2. Can you support provisional billing rates?
  3. Are your indirect rate calculations defensible?
  4. Do you have internal controls over timekeeping?

If the answer to any of these is unclear, strengthening your system should be your first step.

Compliance Drives Profitability

A cost reimbursement contract can be a strategic opportunity, but only if your financial infrastructure supports it. The reimbursement agreement structure shifts risk away from pricing, but it increases compliance expectations.

For government contractors, success under a cost reimbursable structure depends on:

At RKI, we specialize in helping contractors build accounting systems that withstand DCAA scrutiny and support sustainable growth in federal markets.

Not sure if your contract or accounting system is set up correctly? Schedule a consultation with our team to identify gaps, reduce risk, and position your business for compliant, profitable growth.

Understanding FAR and DFARS is essential for any business working with the U.S. government or Department of Defense (DoD). In the first stages of government contracting, confusion around what FAR and DFARS are and how they differ can create compliance risks, contract delays, and costly mistakes.

This guide breaks down FAR vs DFARS, explains regulations, and clarifies the difference between FAR and DFARS clauses so contractors know exactly what applies to their contracts and why it matters.

What Is FAR and DFARS?

FAR stands for the Federal Acquisition Regulation, while DFARS refers to the Defense Federal Acquisition Regulation Supplement. Together, FAR and DFARS establish the rules federal agencies and contractors must follow when acquiring goods and services under DOD contracts.

Federal Acquisition Regulation (FAR)

The Federal Acquisition Regulation is the primary rulebook governing all federal government procurement. It applies to all executive agencies, not just defense-related contracts.

FAR establishes:

Every government contract starts with FAR.

Defense Federal Acquisition Regulation Supplement (DFARS)

DFARS supplements FAR specifically for the Department of Defense. It adds DoD-specific rules, cybersecurity requirements, cost accounting expectations, and national security protections, amongst other agency-specific interests.

If a contract involves the DoD, defense agencies, or defense contractors, DFARS applies in addition to FAR—not instead of it.

FAR vs DFARS: The Key Difference Explained

The simplest way to understand FAR vs DFARS is this:

Core Differences Between FAR and DFARS

AreaFARDFARS
ScopeAll federal agenciesDepartment of Defense only
PurposeStandardize procurementAddress defense, security, and military needs
ApplicabilityUniversalConditional (DoD contracts only)
CybersecurityBasic requirementsAdvanced requirements (e.g., NIST, CMMC)
Cost ControlsStandardEnhanced oversight and reporting

Understanding the difference between FAR and DFARS clauses is critical because DFARS clauses often impose stricter compliance obligations.

What Is the Difference Between FAR and DFAR Clauses?

FAR clauses apply broadly across government contracts, while DFARS clauses address defense-specific risks such as data security, supply chain integrity, and classified information.

Examples of FAR Clauses

Examples of DFAR Clauses

Failing to comply with DFARS clauses even unintentionally can result in:

FAR and DFAR Regulations: Why Compliance Matters

Compliance with FAR and DFAR regulations is not optional. Federal agencies and the DoD expect contractors to understand, implement, and document compliance from day one.

Risks of Non-Compliance

Benefits of Strong FAR & DFARS Compliance

Contractors who proactively manage FAR and DFARS requirements are more attractive to contracting officers and primes.

Who Needs to Follow FAR and DFARS?

Not every contractor needs DFARS compliance, but every federal contractor must follow FAR.

FAR Applies To:

DFARS Applies To:

If your contract references DFARS, compliance is mandatory—even as a subcontractor.

FAR vs DFARS: How to Tell Which Applies to Your Contract

To determine whether FAR, DFARS, or both apply:

  1. Review the contract clauses section
  2. Look for references to:
    • FAR Part numbers
    • DFARS clause numbers (e.g., DFARS 252.xxx)
  3. Identify the contracting agency
  4. Check for flow-down requirements from primes

When in doubt, seeking professional guidance misinterpreting FAR vs DFARS applicability is a common and costly error.

Common FAR and DFARS Mistakes Contractors Make

Even experienced government contractors make avoidable mistakes when navigating FAR and DFARS. These errors often stem from misinterpreting regulations, overlooking clause flow-downs, or underestimating compliance requirements. Understanding the most common FAR and DFARS mistakes can help contractors reduce audit risk, avoid contract delays, and protect long-term eligibility for federal and defense work.

  1. Assuming DFARS Doesn’t Apply to Subcontractors

Incorrect. Many DFARS clauses flow down automatically.

  1. Ignoring Cybersecurity Requirements

DFARS cybersecurity clauses are among the most enforced requirements.

  1. Using Commercial Accounting Systems

Defense contracts often require job-costing and compliance-ready accounting systems.

  1. Treating Compliance as “Later”

FAR and DFARS compliance must be built before bidding, not after award.

Best Practices for Managing FAR and DFARS Compliance

Successfully managing FAR and DFARS compliance requires a proactive, systemized approach, not reactive fixes after a contract is awarded. Contractors that implement best practices early are better positioned to pass audits, maintain contract performance, and scale confidently in federal and defense markets. The following best practices outline how to reduce risk, improve oversight, and stay compliant as requirements evolve.

Top priorities:

For defense contractors, aligning FAR and DFARS compliance with DCAA expectations is especially critical.

FAR and DFARS Are Strategic, Not Just Regulatory

The difference between FAR and DFARS, and how FAR and DFAR regulations impact your contracts is a strategic advantage, not just a compliance requirement.

Contractors who master FAR and DFARS early:

If government or defense contracts are part of your growth plan, FAR and DFARS compliance must be part of your foundation.

Get Expert FAR and DFARS Compliance Support

Navigating FAR and DFARS compliance doesn’t have to be overwhelming. RKI helps government contractors build compliant systems, reduce audit risk, and stay contract-ready at every stage. If you want confidence that your accounting, compliance, and reporting align with FAR and DFARS requirements, schedule a consultation with RKI today and take the next step toward stronger, audit-ready operations.

Many contractors mistakenly refer to “FAR audits,” but in reality, the Defense Contract Audit Agency (DCAA) performs audits that assess FAR and DFARS compliance. These audits review accounting systems, cost structures, and pricing practices to maintain compliance with government regulations.

Technically, there’s no formal audit called a FAR audit, but the term has become shorthand for DCAA audits that review contractor systems and costs for FAR compliance.

Whether you’re preparing to bid on a government contract or maintaining compliance on an existing one, understanding how these “FAR” audits work can help you stay competitive, contract-ready, and financially protected.

What Is a FAR Audit?

The Federal Acquisition Regulation (FAR) is the primary set of rules governing how the U.S. government buys goods and services. It defines what costs are allowable, how contractors must manage accounting systems, and how pricing and billing should be handled.

When auditors review your accounting system, estimating practices, incurred cost submissions, indirect rates, or any of your company’s practices, they’re not auditing the FAR itself, they’re auditing how you demonstrate compliance with FAR. These audits are primarily conducted by the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DMA), or other authorized agencies.

In other words:

A “FAR audit” isn’t an official audit term.  It’s an informal term referring to the types of audits DCAA or DCMA perform to maintain your business follows applicable FAR and DFARS requirements, including how you bid, book, and bill the U.S. Government.

Why FAR Compliance Matters

FAR compliance isn’t just a box to check, it’s a contract requirement. If your business fails to comply, you risk:

Beyond avoiding penalties, maintaining compliance builds trust. Government agencies want contractors who manage taxpayer dollars responsibly. A compliant accounting system and strong internal controls position your company as a reliable long-term partner

Key FAR Compliance Areas Reviewed in DCAA Audits

The specific requirements depend on your contract type and agency, but most DCAA audits evaluating FAR compliance review these key areas across a variety of audit programs:

1. Cost Allowability and Allocability

FAR Part 31 outlines which costs are allowable (permitted under government rules and allocable). Contractors must:

Failing to properly segregate costs is one of the most common causes of audit findings.

2. Adequate Accounting Systems

Your accounting system must demonstrate the ability to record, track, and report costs accurately. An accounting system audit will assess whether your system:

A system deemed inadequate can delay awards or lead to disapproved cost-reimbursement contracts.

3. Internal Controls and Policies in DFARS Business Systems

Auditors evaluate whether your business has written policies and procedures for managing government funds responsibly, including:

Strong documentation proves your organization is proactive about FAR compliance.

4. Incurred Cost Submissions (ICS)

Contractors with cost-reimbursement contracts must submit an annual Incurred Cost Submission (ICS). DCAA audits verify that:

Late or inaccurate submissions can trigger audit findings, questioned costs, and payment delays.

5. Labor and Timekeeping Controls

Labor costs are heavily scrutinized in DCAA audits. To comply with FAR requirements:

Weak timekeeping practices are a leading cause of disallowed costs.

6. Indirect Rates

Auditors review how overhead and G&A (General & Administrative) rates are calculated. Contractors should:

Misstated rates can distort pricing and lead to penalties or cost disallowances.

Types of “FAR” Audits That Assess Compliance

Not every contractor faces the same audit type, some of these include:

Each audit focuses on making sure your company adheres to FAR principles.

Preparing for a DCAA Audit (and Proving FAR Compliance)

Passing a DCAA audit comes down to preparation and consistency. Here’s how contractors can get ready:

  1. Understand your company’s audit risk profile – which audits are applicable to your contracting profile
  2. Conduct internal mock audits – Identify weak areas before the DCAA does.
  3. Keep thorough documentation – Check that every cost and transaction is traceable.
  4. Train your team – Employees must know how to follow timekeeping and cost allocation rules.
  5. Stay updated on regulatory changes – FAR and CAS requirements evolve over time.
  6. Use audit-ready systems – Invest in accounting software built for government contracting.
  7. Work with compliance experts – Specialists can guide you through submissions, rate calculations, and audit readiness.

Common Mistakes That Lead to Audit Findings

Even experienced contractors can stumble. The most common mistakes include:

These issues not only cause audit failures but also damage your reputation with contracting officers.

Partnering with Experts for FAR Compliance

Successfully navigating DCAA audits requires deep understanding of FAR, documentation standards, and internal controls.  Many contractors partner with compliance experts who can:

With expert support, you can move from reacting to audits to confidently managing compliance as part of your business strategy, building trust, stability, and eligibility for future federal opportunities.

While “FAR audit” may not be an official term, the concept behind it, maintaining compliance with the Federal Acquisition Regulation through DCAA audits, is vital for every government contractor.
By understanding what auditors look for and maintaining strong accounting practices, your company can achieve lasting success in the federal marketplace.

Massive changes are coming to the way the federal government does business and if you’re a contractor, you can’t afford to ignore them. For the first time in over 40 years, the Federal Acquisition Regulation (FAR), which is the rulebook for how the government buys everything from pencils to satellites, is getting a top-to-bottom rewrite. This isn’t just an update; it’s a transformation. Whether you’re a seasoned federal contractor or a small business preparing to enter the market, these changes could directly impact how you win contracts, manage compliance, and grow your revenue.

Whether you're a long-time federal contractor or a small business eyeing your first government contract, the Federal Acquisition Regulation News coming and changes in FAR rules and regulations will shape how you bid, win, and perform on contracts. Here’s what you need to know to stay ahead of the curve.

What’s Driving the FAR Rewrite?

First issued in 1984, the Federal Acquisition Regulation has grown into a sprawling, complex regulatory structure spanning dozens of parts, clauses, and supplementary regulations. Over the years, it’s been amended hundreds of times, often in response to new legislation, policies, and priorities. The result? A bloated system that’s often hard to navigate, especially for small and mid-sized businesses.

This rewrite is a long-overdue effort to consolidate, simplify, and modernize the FAR. Lawmakers and acquisition professionals have made it clear: the status quo is no longer acceptable. They’re calling for a system that’s faster, fairer, and more efficient—and that better reflects the realities of modern government contracting.

What Is FAR Consolidation?

At the heart of the rewrite is FAR consolidation. This is a streamlining of overlapping rules, outdated clauses, and duplicate guidance. The idea is to eliminate inconsistencies and combine similar provisions, creating a more cohesive, user-friendly structure.

For contractors, this could mean:

This is welcome news for many firms, especially those bogged down by the administrative burden of staying compliant. By consolidating and clarifying rules, the government hopes to reduce compliance costs and accelerate procurement timelines.

Modernization of Language and Structure

Beyond consolidation, the FAR rewrite will focus on updating the language and format of the FAR to align with today’s digital and business environments. This includes:

These updates are meant to help both seasoned professionals and new entrants understand the rules quickly, reducing errors and boosting efficiency across the acquisition process.

Key Policy Changes Expected

While the full details of the rewrite are still in progress, here are some of the policy changes likely to emerge:

  1. More Flexibility in Contract Types

The government is expected to allow greater use of commercial item contracts, Other Transaction Authorities (OTAs), and Agile procurement models. This would help agencies tap into fast-moving industries like cybersecurity, AI, and cloud computing.  However, OTAs also bring with them their own unique brand of risk as they are often “white space” for negotiable language and/or incorporation of non-standard terms and conditions.

  1. Focus on Performance-Based Outcomes

Contracts may shift further away from rigid deliverables toward performance-based requirements, where payment and evaluation are based on outcomes, not just activity. This approach could favor contractors who focus on value, efficiency, and innovation.

  1. Stronger Cybersecurity Standards

The rewrite is also expected to incorporate enhanced cybersecurity requirements aligned with frameworks like NIST 800-171 and CMMC 2.0. Federal contractors, especially those working with controlled unclassified information (CUI), should prepare for heightened scrutiny.

  1. Equity and Accessibility

While the primary focus of the FAR rewrite is simplification and modernization, broader procurement trends continue to emphasize increasing access for small, disadvantaged, and minority-owned businesses. Though not the central thrust of the current rewrite, agencies may continue pursuing policies that promote supplier diversity, streamline registration processes, and improve access to set-aside opportunities through parallel initiatives or future rulemaking.

How Might the FAR Rewrite Impact Contractors

Faster Proposal Development

With simplified requirements and fewer redundant documents, contractors may be able to build compliant proposals more quickly. This can give small and mid-sized businesses a competitive edge in the fast-moving procurement environment.

Shifting Compliance Risk

By clarifying rules and reducing ambiguity, the rewrite very likely will shift some compliance risks.  For example, less emphasis on things like small business subcontracting could result in lower subcontract small business program risks.  However, increased emphasis on cybersecurity may heighten these risks.  The intent of the FAR rewrite, from where we stand, is to focus the compliance risk where the administration feels it most matters – not eliminate all compliance risk.  Contractors will need to understand where the compliance focus is shifting.

Early industry insights indicate that, at minimum, statutory requirements will remain.  That likely includes Cost Accounting Standards (CAS) and other requirements incorporated through law.  Contractors can track the shift in compliance risk through changes to FAR, but also changes in audit programs, Memorandums to Regional Directors (MRDs), and similar publicly available documents that inform U.S. Government personnel and contractors on how to navigate the massive change.

Shifting Evaluation Criteria

Agencies may adopt new evaluation frameworks focused more heavily on past performance, innovation, and cost-effectiveness. Contractors should consider updating internal metrics and client success stories to align with these trends.

What Should Government Contractors Do Now?

  1. Stay Informed

Monitor Federal Acquisition Regulation news regularly from trusted sources like the Federal Register, GSA, and industry sites like Federal News Network. Changes may roll out in phases, with opportunities for public comment. It’s also important to note that FAR parts 2, 34, and 52 are already out as of May 2nd, 2025.

  1. Reassess Your Compliance Posture

Take stock of your current policies, internal controls, and recordkeeping processes. Are your processes compliant with those areas of shifting compliance risk.  RKI can assist you with evaluating your readiness for increased audit scrutiny in those areas that appear to be gaining focus.

  1. Plan for Technology Integration

As procurement moves further into the digital realm, contractors will need to modernize their proposal and contract management tools. Cloud-based platforms, compliance dashboards, and data analytics will play a larger role under the new rules.

  1. Train Your Team

New policies mean new responsibilities for proposal teams, project managers, and accounting staff. Invest in FAR training to help your team interpret and implement the revised FAR rules and regulations effectively.

How RKI Can Help

At RKI, we specialize in helping government contractors prepare for change. Whether it's optimizing your accounting system, ensuring compliance with CAS preparing for DCAA audits, or navigating the shifting procurement landscape, our team has you covered.

We are actively monitoring the FAR rewrite process and will continue to publish updates, insights, and best practices to help clients make strategic decisions. Our goal is to turn regulatory updates into growth opportunities for your business.  As has always been the case for U.S. Government contractors, the rules are a barrier to entry.  As such, those who can comply can compete.  Let us help you be first in line for doing so.

Partner With Experts to Stay Ahead of the Curve

The FAR rewrite represents both a challenge and an opportunity for government contractors. It’s a chance to shed outdated processes, simplify compliance, and compete more effectively in the federal space.

By staying proactive, investing in preparation, and partnering with experts like RKI, your business can turn this evolving regulatory environment into a strategic advantage.

Ready to prepare for the new FAR? Contact RKI today to schedule a free consultation and stay ahead of the change.

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