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What is a DCAA Audit?

As a government contractor, audits, sometimes DCAA, are a regular part of the business. It is the Contracting Officer’s responsibility to request an audit. Here are six important questions that arise:

  1. What is a DCAA audit?
  2. How important is it to my business?
  3. When can I expect it?
  4. How do I prepare for it?
  5. How do I survive it?
  6. What does it buy my company?

This blog post will address the first two questions. A DCAA audit is an evaluation of a condition within your company against particular government standards and/or regulations. I will list the various audits in order of the life cycle of a typical contractor.

1. Pre-award Pricing Proposal Review

You have submitted a cost proposal on a FAR 15, Negotiated Contract, procurement. The auditor’s job is to determine if the pricing proposed is fair and reasonable. In government contracting, pricing is considered fair and reasonable if there is adequate competition or if pricing is based on projected costs incurred, then the reasonableness, allocability, and allowability of the projected direct and indirect costs. Ultimately, the auditor will produce information for the government to project the real price of your cost proposal. This could determine win versus loss of this procurement.

2. Pre-award Accounting System Review

The auditor’s job is to evaluate the design of Accounting System to determine if it is acceptable for prospective contract. Per FAR 9.104-1(e), to be determined responsible, the contractor must have the necessary accounting and operational controls in place. The auditor uses the SF1408 from FAR 53 as a guideline. The form is a checklist of criteria. The auditor must check “Yes” to all applicable criteria or you and your system fail the review. When you pass, you will move forward to the next step of the procurement process.

3. Financial Capability Review

The auditor’s job is to determine if the potential contractor can stay in business long enough to complete existing and potential contract work.  The auditor will request financial statements to conduct a financial analysis on them. The auditor will focus on 8 key financial ratios. Unless a review of the certified statements uncovers something obviously erroneous and of a material nature, the analyst can only assume that the statements are accurate.  The contractor’s or its CPA’s certification is required. This could determine win versus loss of this procurement.

4. Floorcheck Review

The auditor’s job is to evaluate the accuracy of contractor employees (salaried and/or hourly) labor hour charges to contracts, indirect accounts, or other cost objectives. When properly tailored and approved by the supervisory auditor, this program can be used to perform labor floor checks and interviews to help satisfy the mandatory annual audit requirement relating to labor floor checks and/or interviews. Typically, this review is done without prior notification. This could determine the level of scrutiny the government uses in reviewing you billings or whether the government choosing to continue your current costs reimbursable contracts.

5. Incurred Cost Audit

You have been operating and billing a cost reimbursable contract, cost plus or T&M. You have provided an incurred cost submission to the government. The auditor’s job is to evaluate the accuracy of the incurred cost submission; ultimately determining whether you have under-billed or over-billed the government. The auditor will conduct transaction testing of your general ledger and the support documents available to support the transactions to determine the total costs per contract with indirect costs applied. An important aspect is the determination of allowability, allocability, and reasonableness of costs. Note: retaining source documents is of vital importance in these engagements. This will determine whether you owe money to the government or the government owes you.

6. Postaward Defective Pricing Audit

The government thinks that you have violated the Truth In Negotiations Act. You have inflated the costs projections used as the basis of your costs proposal in order to raise the price of an Fixed Priced or T&M contract. The auditor’s job is to determine if a negotiated contract price was increased by a significant amount because the contractor did not submit or disclose accurate, complete, and current cost or pricing data.

In our next blog post, we’ll address what you can expect in a DCAA audit. Have questions? 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.

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