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.