How to Prepare for Your DCAA Audit

You’re on the right path. Preparing for your DCAA audit before it happens is the best way to set up your government contracting business for success. With the right DCAA compliant accounting system, which we’ll cover in this post, you’ll see how integrating your time, project and financial management will automate the process of building you what we like to call a fool-proof audit trail. 

But first, let’s start with the basics. 

What is the purpose of a DCAA audit?

The primary purpose of a DCAA audit is to check in on the cost of a project. Money spent by the government must be classified in different ways than a standard business may go about the payment for contracted work. Common things for the DCAA to inspect include: allowable costs, unallowable costs, direct costs, indirect costs, cost pools, and pooling of indirect costs. Compliant timekeeping plays into compliant accounting by providing the accurate time spent to bill. Each step of the compliance process is important for the audit so there isn’t a domino effect of errors. For further details on the items inspected during an audit, visit the FAR website.

Types of DCAA Audits

There are a variety of audits the DCAA can conduct before, during, and after the contract is awarded. Below are the most common types of audits and the purpose behind them. 

Forward Pricing

Before the contract is awarded a forward pricing audit may be completed. During this process, DCAA auditors evaluate the contractor’s estimate of the cost of providing the goods or services to the government.

Special Audits

This audit type can take place before or after the contract award. Most commonly they are in response to a request from contracting officers, who need an independent financial opinion regarding parts of a contract or the contractor’s accounting system. This request prevents the contracted work from moving forward, so this audit type receives high priority.  

Incurred Cost

For contacts that do not have a fixed price, the DCAA will conduct an incurred cost audit after the contract award. The purpose of this audit is to determine the accuracy of a contract’s annual allowable cost representations. 

Pre-Award Surveys

Small businesses are most commonly affected by DCAA Standard Form (SF) 1408 pre-award surveys. The goal of this audit is to evaluate the contractor’s accounting system to determine whether it is acceptable for the award of a government contract. In this process, the contractor must be able to demonstrate a compliance accounting system and have it implemented before incurring any costs of the contract. 

The SF-1408 evaluates: 

• Cost allocations, indirect and unallowable costs
• Time tracking system
• Labor distribution
• Billings
• Accounting system operations

Other Audits

Less common than the previous examples, there are other audits that can be performed after the contract award at the request of a contracting officer of the DCAA. These audits are reserved for high-risk situations, such as inadequate business systems and practices. 

How long does a DCAA audit take? 

The most common type of audit is the incurred cost audit, which on average takes 140 days. Special audits take an average of 120 days and forward pricing an average of 80 days. 

DCAA Audit Preparation 

Once you know what to expect, the most important part is being prepared ahead of time. It’s always recommended to build an accounting system for your firm that automates your time tracking, billing, and reporting for a fool-proof audit trail. 

Best practices for preparing your accounting system for a DCAA audit

1. Work with a trusted partner. Finding a DCAA compliance consultant to guide you through the process can take away a lot of the stress that comes with audits. Although it’s an upfront investment, it can save you a lot of time and money down the road. DCAA consultants work with you to identify and implement the appropriate internal procedures and policies for your line of work while keeping your business efficient as it grows. They can also help train your staff on the changes and how to navigate the rules for preparing for an audit. 

2. Align your accounting system and budget. When setting up your accounting system you should make sure it’s a reflection of how you define, operate, and manage your business along with the ability to successfully meet all compliance requirements. Having your budget and accounting system designed in the same structure will enable you to properly and easily analyze financial information.

3. Accurately capture time, expenses, and project information. Time tracking is a big part of DCAA compliance as it directly ties into the capturing of all labor hours and costs in your accounting software. Make sure you are using a DCAA compliant time tracking software that includes project management capabilities that directly feeds information to your accounting software to ensure project names and codes are consistent, updated in a timely manner, and eliminate any margin of error that comes with double data entry.

4. Ensure you have the proper reporting capabilities. The most important part of automating your audit-trail is having a system that can generate (systematically, accurately, and timely) financial reports, including a statement of indirect and unallowable costs. Your reporting structure should include a chart of accounts that properly identifies, classifies, and segregates costs into appropriate projects and cost pools.

5. Documented policies and procedures. A part of following the DCAA rules is making sure you have the documentation to back it up. Once you have your system and operation workflow in place, make sure to formally document the policies and procedures. Even more critically, it is your responsibility to make sure they’re adhered to and enforced. It won’t help to have them written down if your team can’t show them working. 

What resources does the DCAA provide to help with an audit?

The official guide for the audit process is called the DCAA Information for Contractors. This document provides an overview of the audit process, checklists to ensure you’re compliant, and what to expect when taking on a government contracting engagement. Specific DCAA consultants are also a good resource to help your team get organized with a set process and ways to ensure compliance. 

For more information on setting up a DCAA compliant accounting system and budget, including free templates, view our webinar with the President of Golden Gait Consulting, Heather Kourcklas.