Audits don't have to be scary. Here's how they actually work.
The Defense Contract Audit Agency was founded in 1965 with one job: make sure taxpayer dollars going to defense contractors are spent properly. They provide audit and financial advisory services to the Department of Defense and other federal agencies.
DCAA doesn't award contracts and they don't terminate them. They audit. They look at your books, your timesheets, your cost allocations, and your processes. Then they tell the contracting officer whether your numbers check out.
If you hold cost-reimbursable contracts, time-and-materials (T&M) contracts, or you're bidding on anything that requires cost proposals, DCAA will audit you. It's not a question of if. It's when.
It's not just about passing audits. It's about how you run your business.
Know what's coming before the auditor shows up.
The big one. DCAA evaluates whether the costs you claimed on flexibly-priced contracts match what you actually spent. Due six months after your fiscal year ends.
Before you get a cost-type contract, DCAA checks whether your accounting system can handle it. They use the SF 1408 checklist. Fail this, and the award goes somewhere else.
When you bid on future work, DCAA evaluates whether your proposed rates are reasonable. They compare your projections against historical data and industry norms.
Auditors show up unannounced to verify employees are working where their timesheets say they are. They check for after-the-fact recording, supervisor approvals, and corrections with audit trails.
Assesses six business systems. DCAA audits your accounting, estimating, and material management systems. DCMA handles purchasing, property management, and EVMS.
Targeted audits that focus on high-risk areas — subcontract costs, compensation reasonableness, consultant fees, or specific questioned costs flagged during other reviews.
Every audit comes down to three things. Nail these and you're ahead of 90% of contractors.
Accurate records. Transparent costs. Every dollar accounted for, every charge supported by documentation. Your data has to be clean, complete, and consistent.
A clear paper trail from transaction to report. Written policies and procedures that your team actually follows. Traceable information flow from timesheet entry to invoice.
It's not enough to be compliant. You have to prove it. That means being able to walk an auditor through your processes and show that your practices match your policies.
The rulebooks that govern everything you do as a defense contractor.
The primary rulebook for federal procurement. Over 2,300 pages of regulations covering everything from contract formation to cost principles. FAR Part 31 defines what costs are allowable, allocable, and reasonable.
The DoD-specific supplement to FAR. Adds defense requirements including cybersecurity (NIST 800-171), CUI protection, and defense-unique acquisition procedures.
Ensures contractors use consistent cost measurement, assignment, and allocation practices. If you change how you account for costs, you have to disclose it and may owe the government money.
The cybersecurity clause. Requires NIST SP 800-171 compliance for systems handling CUI. Mandatory incident reporting within 72 hours. This is the clause behind the CMMC push.
Forget the legalese. Here's the practical checklist.
These aren't hypotheticals. They happen every week to contractors who thought they were covered.
Invoices questioned, payments slowed. Auditors flag costs they can't verify. Your cash flow stalls while you dig up documentation you should have had ready.
Costs disallowed retroactively. Money you already spent and billed gets clawed back. You eat the cost. No negotiation.
Margins quietly eroded. Indirect rates miscalculated over months or years. By the time you catch it, the damage is done.
Forecasts become unreliable. Without clean cost data, your estimates for future bids are guesses. Bad bids win bad contracts.
Cash flow unpredictable. When you can't prove costs are allowable, payments get held. Some contractors wait months for money they've earned.
Missing timesheets flagged. One employee forgets to submit for a week. That's a finding. Enough findings and your entire timekeeping system is deemed inadequate.
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| Acronym | Full Name |
|---|---|
| DCAA | Defense Contract Audit Agency |
| DCMA | Defense Contract Management Agency |
| FAR | Federal Acquisition Regulation |
| DFARS | Defense Federal Acquisition Regulation Supplement |
| CAS | Cost Accounting Standards |
| ICE | Incurred Cost Electronically (submission tool) |
| ICS | Incurred Cost Submission |
| SF 1408 | Pre-Award Accounting System Adequacy Checklist |
| EVMS | Earned Value Management System |
| CPSR | Contractor Purchasing System Review |
| MMAS | Material Management and Accounting System |
| POA&M | Plan of Action & Milestones |
| G&A | General & Administrative (expense pool) |
| CUI | Controlled Unclassified Information |
| FCI | Federal Contract Information |
| GAGAS | Generally Accepted Government Auditing Standards |
You didn't start a defense contracting company to chase timesheets and organize filing cabinets. Let the AI handle it.
Book a Discovery CallSources: DoD DCAA Official Site · Federal Acquisition Regulation · DFARS