DCAA Audit Process: When Can You Expect A DCAA Audit

In our last blog post, we provided the background for what to expect from a DCAA audit. In this post, I’ll give share my experience concerning the “when” as part of the DCAA audit process.

As mentioned before, it is the Contracting Officer’s responsibility to request an audit.

A DCAA audit is an evaluation of a condition within your company against particular government standards and/or regulations. The various audits are:

• Preaward Pricing Proposal Review
• Preaward Accounting System Review
• Financial Capability Review
• Floorcheck Review
• Incurred Cost Audit
• Postaward Defective Pricing Audit

When to expect an audit is greatly determined by the type of audit, which is greatly determined by the type (s) of contracts. The basic types of contracts are:

• Cost Plus
• Time & Material (T&M)
• Firm Fixed Price (FFP)

Cost Plus

Your probability of having DCAA audits is increased exponentially with cost plus contracts.

• Preaward Accounting System Review: 90%

First, per FAR 9.104-1(e), to be determined responsible, the contractor must have the necessary accounting and operational controls in place. This usually is interpreted as in order for a contractor to be awarded a cost plus contract, they must have an adequate accounting system. Thus, there must be a review/audit of a contractor’s accounting system to determine adequacy. Thus, if awarded a cost plus contract, the probability of audit is 90% in my experience.

• Incurred Cost Audits: DOD, USAID, NASA: 75%, CMS: 40% Other Civilian Agencies: 15%

When awarded a cost plus contract, the contractor is required to submit an annual incurred cost submission to its cognizant agency or DCAA. Typically, there is an initial review of the submission by an auditor to determine the adequacy of the submission. Later, the government will determine whether they will audit the submission for the year or years. The determination is based on risk. I don’t know the formula, so I can’t share that with you. However, sometimes, I cannot make sense of the decision. Recently, a client was required to do an incurred cost submission for an $8,500. Luckily, DCAA decided not to audit and accept the indirect rates proposed. We have had clients go through incurred cost audits even though the submission shows that they are grossly under-billed and the government will have no recovery.

• Floorcheck: 10%

Mostly happens to larger contractors.

• Preaward Pricing: 25%

Occurs more for DOE and NASA procurements in my experience. There was a directive from DCMA a few years ago saying that DCAA would not review cost plus proposals for amounts less than $100 million.

For more information and for help preparing for your audit or in the DCAA audit process, contact us.

KDuncan & Company is dedicated to providing knowledge and support for small government contractors about concerns regarding government contracting. For questions on areas such as as cost proposals, accounting systems, DCAA compliance, and incurred cost audits, reach out to KDuncan & Company.