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:
- Loss of current and future contracts
- Repayment of disallowed costs
- Financial penalties or contract termination
- Suspension or debarment from federal contracting
- Delayed payments or contract awards
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:
- Exclude expressly unallowable costs such as entertainment, lobbying, and certain advertising.
- Properly allocate costs between direct and indirect categories.
- Document each expense to show its purpose and connection to contract work.
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:
- Separates direct and indirect costs.
- Tracks costs by contract and task order
- Provides timely, accurate reports.
- Includes audit trails for all transactions.
- Has controls to prevent billing errors or fraud.
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:
- Cost estimating
- Accounting, including timekeeping, project accounting, billing, and indirect cost rates
- Procurement and purchasing controls.
- Expense reimbursement policies.
- Indirect cost allocation methodologies.
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:
- Claimed costs are accurate, allowable, and complete.
- Indirect rates are correctly applied.
- All required schedules are properly documented.
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:
- Employees must record time daily and accurately.
- Supervisors must review and approve timesheets.
- Labor costs must reconcile with invoices and payroll records.
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:
- Use consistent methodologies.
- Clearly document rate calculations.
- Maintain indirect costs are fairly allocated across contracts.
- Monitor indirect cost rates across forward pricing, provisional billing, and final actual rates
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:
- Incurred Cost Audits
- Accounting System Audits
- Estimating System Audits
- CAS Audits
- Proposal Audits
- Truthful Cost or Pricing (“TINA”) / Defective Pricing Audits
- Forward Pricing Rate Audits
- Provisional Billing Rate Audits
- And More
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:
- Understand your company’s audit risk profile – which audits are applicable to your contracting profile
- Conduct internal mock audits – Identify weak areas before the DCAA does.
- Keep thorough documentation – Check that every cost and transaction is traceable.
- Train your team – Employees must know how to follow timekeeping and cost allocation rules.
- Stay updated on regulatory changes – FAR and CAS requirements evolve over time.
- Use audit-ready systems – Invest in accounting software built for government contracting.
- 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:
- Charging unallowable costs to contracts.
- Weak or inconsistent timekeeping.
- Poor or no internal control environment
- Late or incomplete incurred cost submissions.
- Misstated indirect rates.
- Outdated or undocumented policies.
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:
- Conduct readiness assessments before official audits.
- Develop compliant business systems and policies.
- Represent your business during DCAA audits.
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.