A post-award audit is where the Defense Contract Audit Agency (DCAA) tests what actually happened after contract award, using your real transactions, your labor charging behavior, your billing practices, and your internal controls as evidence.
In practice, that means your “financial system” is judged less by how it looks on paper and more by whether it produces contract cost data that is traceable, supportable, and compliant when auditors follow the trail from source documents to billings and reported indirect rates.
Policies and software matter, but audit findings hinge on proper daily execution and sound control discipline. For organizations evaluating outsourced DCAA-aware accounting support, post-award activity can reveal far more about system integrity than any proposal narrative ever could.
| In This Article: A close look at how post-award DCAA audits evaluate accounting system design, labor charging controls, indirect cost structures, and billing traceability, and what those findings signal for organizations relying on outsourced DCAA-aware accounting support. |
When System Design Meets Real Contract Performance Under DFARS Standards
Post-award audit activity quickly shifts attention from accounting theory to actual operational reality. The DCAA evaluates whether the accounting system, as implemented, produces reliable contract cost data that aligns with DFARS 252.242-7006 criteria.
An acceptable accounting system must accumulate costs by contract and cost objective, segregate direct and indirect expenses, support timekeeping and labor distribution, and generate auditable billing data.
Auditors trace transactions from source documents through the general ledger and into billings, looking for consistency and traceability. Cost segregation often breaks down under pressure, especially when direct costs settle into indirect pools or job cost records fail to reconcile cleanly with financial statements.
An accounting platform may appear sound in reports, yet audit testing reveals gaps in procedures, documentation flow, or control execution. Formal findings can arise when system outputs don’t match DFARS expectations, and those findings can trigger payment withholds under the Contractor Business Systems clause.
Outsourced accounting arrangements don’t shift responsibility away from the contractor. The DCAA reviews daily operations to evaluate the integrity of the system of record and the control environment that supports it. Effective reporting must be supported by rigorous documentation discipline; otherwise, deficiencies may persist.
Labor Charging and Timekeeping Practices Under the Microscope of Floor Checks
Labor accounts for a significant share of costs in cost-type and labor-hour contracts, making it a frequent audit focus.
The DCAA conducts floor checks and real-time labor evaluations, sometimes unannounced, interviewing employees and reconciling observed activity to time records and payroll data. Audit procedures test whether labor is charged to the correct cost objective at the time work is performed, rather than reconstructed after the fact.
Control expectations extend beyond simple timesheet completion. Effective systems separate timekeeping duties from payroll processing, require employee certification, and mandate supervisory approval. Corrections should follow documented procedures, with clear audit trails that explain what changed and why. Informal adjustments or late entries raise questions about the reliability of labor distribution outputs, even if payroll totals reconcile.
Real-time testing often exposes cultural habits within an organization. Employees may rely on memory to allocate hours at week’s end, or supervisors may approve timecards without reviewing job codes carefully.
Indirect Cost Structures and The Incurred Cost Audit That Tests Their Integrity
For cost-reimbursement contracts, an adequate final indirect cost rate proposal is required within six months following the end of the fiscal year. That submission triggers incurred cost audits, where the DCAA evaluates allowability, allocability, and reasonableness in light of contract terms, GAAP, and, when applicable, Cost Accounting Standards.
The incurred cost audit program thoroughly examines the design of the chart of accounts, the composition of indirect cost pools, and the bases for allocation. Indirect pool composition frequently reveals structural weaknesses. Expenses that behave like direct costs sometimes flow into overhead pools, distorting allocation results and creating questioned costs.
Allocation bases may be mathematically consistent yet fail to reflect the activity benefiting from the pool, leading auditors to challenge allocability. Inconsistent treatment of similar costs across periods introduces further compliance risk, particularly in CAS-covered environments.
Certification of final indirect cost rate proposals adds another layer of exposure. FAR clauses require allowability under the applicable cost principles, and they also require expressly unallowable costs to be identified and excluded from any billing, claim, or proposal submission.
Weak unallowable cost segregation processes often surface during incurred cost audits, especially when entertainment, lobbying, or other selected cost categories remain embedded in indirect pools. Penalty provisions tied to expressly unallowable costs increase the financial stakes.
Billing, Public Vouchers, and the Audit Trail That Connects Ledger to Payment
Billing marks the transition from internal accounting records to an official claim for government reimbursement.
DCAA voucher examinations assess whether interim vouchers are prepared directly from cost accounting records, rely on established billing rates, and include adequate supporting documentation. Reconciliation between billed amounts and underlying cost accounts, both current and cumulative, serves as a foundational control test.
Breakdowns often occur when job cost systems, general ledgers, and billing modules operate in partial isolation. Auditors question the reliability of the entire system if they cannot clearly trace billed costs to accounting records. Documentation sufficiency extends beyond summaries; source records must exist, be accessible, and meet record retention requirements under applicable FAR provisions.
Subcontract costs present additional complexity. Prime contractors remain responsible for claiming allowable costs, which requires visibility into subcontractor billings and, in some cases, access to subcontractor records. Audit rights clauses permit examination of records sufficient to substantiate claimed costs, with an emphasis on document management practices across the supply chain.
Turning Post-Award Audit Insight Into Stronger Financial Systems and Confident Contract Performance
Post-award DCAA scrutiny reveals how accounting systems perform when tested against real transactions, labor practices, indirect rates, and billings. Findings often reflect control, discipline, and governance as much as technical accuracy. Diener & Associates has supported government contractors since 1989, pairing hands-on guidance with the responsiveness of a focused CPA firm. A consultation with our team can clarify system strengths and address risk areas before auditors do.
Set up a consultation online or call 703.386.7864 to speak with the CPAs at Diener & Associates about your needs and the next steps to take.