DCAA Accounting System Readiness Assessment

    Answer 8 questions to assess your DCAA compliance risk. Takes 2 minutes. Identifies gaps before an audit finds them.

    Question 1 of 813%

    Do you have cost-type government contracts? (CPFF, CPAF, T&M, or Cost-Reimbursable)

    What DCAA Readiness Involves

    DCAA requirements come into play when you hold, or are bidding on, flexibly priced contracts — cost-reimbursement, time-and-materials, or labor-hour — mainly with the Department of Defense. DCAA audits your accounting system and costs; the contracting officer uses those audits to make decisions about awards, rates, and payments.

    Before award: the SF 1408 survey

    A cost-reimbursement contract may only be awarded when your accounting system is adequate for determining costs (FAR 16.301-3). Agencies often confirm this with a pre-award survey using Standard Form 1408, which asks whether your system segregates direct and indirect costs, accumulates costs by contract, records labor through a reliable timekeeping process, and identifies and excludes unallowable costs. Much of this assessment tracks those questions.

    After award: DFARS system criteria

    Contracts that include DFARS 252.242-7006 require an accounting system that meets its listed criteria on an ongoing basis — including cost segregation, timekeeping, exclusion of unallowable costs, billing controls, and reconciliation of subsidiary ledgers to the general ledger. Under the business systems clause (DFARS 252.242-7005), significant deficiencies can lead to payment withholds until they are corrected.

    Every year: the incurred cost submission

    FAR 52.216-7(d)(2) requires a final indirect cost rate proposal — the incurred cost submission — within six months after the end of your fiscal year. It shows actual direct and indirect costs by contract and establishes final rates. Unallowable costs must be removed before submission; including expressly unallowable costs can bring penalties. A clean general ledger, consistent indirect rate structure, and documented allocation methods make the submission far easier to prepare and support.

    Where contractors usually fall short

    The most common problems are practical rather than technical: timesheets completed after the fact instead of daily, indirect costs pooled without a written allocation method, unallowable items such as entertainment or certain lobbying costs left in overhead, and job cost reports that do not reconcile to the general ledger. Each of these can be fixed with written policies and consistent monthly review, ideally before a pre-award survey or audit is scheduled.

    Learn more about our government contractor audit services, DCAA incurred cost support, and our full Audit & Assurance practice.

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    DCAA FAQ

    The Defense Contract Audit Agency (DCAA) audits government contractor accounting systems and incurred costs on federal contracts. DCAA ensures that costs charged to cost-type contracts are allowable, allocable, and reasonable under FAR Part 31.

    DCAA audits and reports on the system, but the contracting officer makes the adequacy determination. A cost-reimbursement contract may only be used when the contractor's accounting system is adequate for determining costs (FAR 16.301-3), so an inadequate system can block new cost-type awards until deficiencies are corrected. For contracts with the DFARS business systems clause, significant deficiencies can also lead to payment withholds (DFARS 252.242-7005).

    DCAA selects contractors for audit based on a risk-based approach. All contractors with flexibly-priced contracts (cost-type) must submit annual Incurred Cost Proposals (ICPs). DCAA may audit pre-award, post-award, or on a risk-triggered basis.

    An Incurred Cost Proposal (ICP) is an annual report of actual direct and indirect costs incurred on flexibly-priced government contracts, due within six months after the end of the contractor's fiscal year per FAR 52.216-7(d)(2). It reconciles estimated costs used for billing with actual costs.

    Yes, but CPA guidance significantly reduces the risk of disallowed costs and adverse findings. DCAA auditors look for documented policies, consistent timekeeping, proper cost segregation, and supportable indirect rate structures — areas where an experienced CPA adds significant value.

    Standard Form 1408, Pre-Award Survey of Prospective Contractor Accounting System, is the checklist used to evaluate whether a prospective contractor's accounting system is acceptable before a cost-type award. It asks, among other things, whether the system segregates direct and indirect costs, accumulates costs by contract, supports timekeeping, and excludes unallowable costs.

    DFARS 252.242-7006 lists the criteria an acceptable accounting system must meet for contracts that include the clause. They include proper segregation of direct and indirect costs, identification and accumulation of costs by contract, a timekeeping system that identifies labor by intermediate or final cost objective, exclusion of unallowable costs, and reconciliation of subsidiary ledgers to the general ledger.

    The contracting officer — usually the administrative contracting officer — makes the determination. DCAA performs the audit and reports deficiencies, and the contractor typically has an opportunity to respond and submit a corrective action plan before a final determination is made.

    Also see: Audit Requirement Checker | Single Audit Checker

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