What is a DCAA audit?
A DCAA (Defense Contract Audit Agency) audit is the federal government's review of your accounting system, cost proposals, and incurred costs on cost-reimbursement contracts. Passing DCAA audits is a prerequisite for many cost-type federal contracts and is critical for cost-reimbursement contractors.
The Defense Contract Audit Agency (DCAA) is a component of the Department of Defense that provides audit services to DoD and, on a fee basis, to other federal agencies. DCAA audits federal contractors that hold or seek to hold cost-reimbursement contracts (as opposed to firm-fixed-price contracts).
Types of DCAA audits: - Pre-award accounting system audit: performed BEFORE a cost-reimbursement contract is awarded. Reviews your accounting system's ability to accurately track and report costs by contract, direct/indirect cost segregation, and adequate internal controls. Passing this audit is often a prerequisite for the award. - Forward pricing rate agreement (FPRA): DCAA reviews and negotiates your indirect cost rates (overhead, G&A, fringe) that will be applied to future cost proposals. Having an FPRA speeds up cost-proposal evaluation. - Cost proposal audit: DCAA reviews your specific cost proposal for realism, allowability under FAR Part 31, and reasonableness before contract award. - Incurred cost audit: post-award audit of your actual costs on cost-reimbursement contracts. Any costs found unallowable are disallowed, and the government recovers overpayments plus interest and potential penalties. - Termination settlement audit: performed when a cost-type contract is terminated for convenience.
What DCAA looks for: - Cost segregation: direct costs must be tied to specific contracts; indirect costs must flow through defined pools and bases per your Disclosure Statement (DS-1) if required. - Allowability: costs must be allowable under FAR Part 31 (many categories of costs are unallowable — entertainment, alcohol, most lobbying, most advertising, certain bonuses, etc.). - Documentation: every cost claim needs supporting documentation (receipts, timesheets, allocation methodology). - Consistency: rates and allocation practices must be applied consistently across all contracts.
For small businesses considering cost-type contracts: - The compliance burden is real. Passing a DCAA accounting system audit typically requires a compliant accounting system (Deltek, Unanet, QuickBooks with contractor add-ons) and formal cost accounting policies. Setup cost is $10K-$50K for consultants + $2K-$5K/month for the software. - Many small businesses avoid cost-type contracts specifically to avoid DCAA complexity. Fixed-price contracts don't require DCAA audit. - If you plan to grow into cost-type work, get your accounting system set up EARLY — waiting until you win a contract to build the system creates award risk. - SBA offers free consulting on DCAA readiness through Small Business Development Centers (SBDCs) and APEX Accelerators (formerly PTACs).