DCAA compliance remains a fundamental requirement for government contractors seeking to win and maintain federal awards. The Defense Contract Audit Agency (DCAA) reviews contractor systems, cost data, and billing practices to protect public funds and promote accountability across contract types.
Each contract family carries distinct expectations, audit triggers, and documentation standards that can influence the audit burden and financial exposure.
Why DCAA Compliance Matters Across Contract Types
Contractors doing business with the U.S. government regularly encounter audits from the DCAA, whose mission is to protect federal funds.
The DCAA scrutinizes proposals, billing practices, business systems, and incurred costs. Audit findings can potentially result in suspended billings, withheld payments, or delays in contract awards.
Government Accountability Office (GAO) reports have identified weak internal controls and delayed audits as significant sources of financial risk, thereby heightening contractor vulnerability. Meeting DCAA requirements proactively avoids audit-driven disruptions and maintains a steady cash flow.
Contract Type Fundamentals and Audit Expectations
|
Contract Type |
Statutory & Regulatory Source | Primary Provisions for Cost Recovery | Why It Matters to the Accounting System |
| Firm-Fixed-Price (FFP) | FAR 16.202
FAR 15.403 (Truthful Cost or Pricing Data) CAS (if applicable) |
No direct cost recovery beyond the agreed price. Proposal realism matters when cost data is certified. CAS applies above the $2 million threshold. |
Must support proposal cost realism, estimate-to-complete tracking, and cost buildup logic for price validation and progress-payment reviews. |
|
Fixed-Price Incentive / Award-Fee |
FAR 16.403/16.404 | Profit varies with performance. Incentive targets and performance metrics must be documented and measured. | Requires precise incentive tracking, metric validation, and proper segregation of cost pools tied to performance-based fees. |
| Cost-Reimbursement (CPFF, CPIF, etc.) | FAR 16.301 | Recovery is limited to allowable, allocable, and reasonable costs. Requires an adequate accounting system and timely ICE submission. |
Must accumulate costs by contract, maintain indirect pools consistent with disclosed practices, and support provisional and final billing rates. |
|
Time-and-Materials / Labor-Hour |
FAR 16.601/16.602
FAR 31 |
Direct labor is reimbursed by actual hours at loaded rates. Materials are reimbursed at cost or with a fixed add-on. ICE Schedule K is often required. | Requires real-time labor tracking, detailed rate calculations, and accurate reconciliation of billed hours to cost objectives. |
| IDIQ / Multiple-Award Vehicles | FAR 16.504
Contract-Specific Orders |
Orders may be fixed-price, cost-type, or T&M. Ceiling rates and task-order level tracking are enforced. |
Must allocate direct and indirect costs by order, maintain audit trails for each pricing type, and reconcile costs by contract line item. |
Essential DCAA Compliance Requirements at Each Contract Phase
From the initial proposal through the final contract close-out, contractors encounter several distinct compliance obligations at every stage.
Pre-award compliance begins with completing the SF 1408 Accounting System checklist. Contractors must demonstrate that systems accurately segregate costs, accumulate them by contract, and reliably document timekeeping activities.
Following system approval, contractors must meet the DFARS 252.242-7006 criteria, maintaining reliable, compliant accounting systems that minimize billing errors and mischarging. Proposals submitted to federal agencies must consistently present current and accurate cost data, supported by realistic indirect rate projections, to withstand scrutiny by auditors.
During contract performance, the DCAA expects contractors to sustain accurate provisional billing rates on cost-type contracts, adjusting promptly when actual rates deviate materially from projections. Interim vouchers submitted to government agencies must be precise and timely, with rapid responses provided to auditor requests for additional information or clarification.
Annual incurred-cost submissions (ICE packages) present significant challenges, demanding adherence to FAR 52.216-7 schedules. Compliance with DCAA guidelines requires submitting reports within a six-month window following the close of the fiscal year. Non-compliance in this area frequently leads auditors to impose unilateral rate determinations and fee withholds, negatively impacting contractor profitability and cash flow.
Upon contract close-out,the DCAA thoroughly reviews finalized incurred-cost submissions, resolves outstanding audit findings, and certifies indirect rates. Contractors submit final vouchers at this stage, formally completing the contract. Any unresolved discrepancies can trigger repayment demands and complicate future audit interactions.
Maintaining Business Systems and CAS Compliance
Beyond transactional compliance, the DCAA closely monitors overall business systems, guided by the Defense Contract Management Agency (DCMA)’s CAS Administration Manual.
The manual directs contracting officers to oversee contractor compliance with cost accounting practices. The GAO highlights the importance of timely system audits, specifically in accounting, estimating, purchasing, and other essential systems, as necessary to maintain contractor eligibility for government payments and awards.
If the DCAA identifies deficiencies in any of the six covered systems, it may authorize additional audits or withhold up to 5% of progress payments. The covered systems include accounting, estimating, the Earned Value Management System (EVMS), Material Management and Accounting System (MMAS), purchasing, and property management.
Contractor responsiveness to any potential system deficiencies significantly affects business continuity and profitability.
Avoiding Common Pitfalls in DCAA Compliance
Several frequent pitfalls undermine contractors’ compliance efforts, raising audit red flags and increasing financial risk. Late or incomplete ICE submissions create substantial issues, as auditors quickly flag them for non-compliance, potentially leading to costly unilateral rate determinations.
Labor-related controls pose another significant risk area, particularly ghost-charging or inaccurately classifying labor hours. These inaccuracies prompt DCAA floor-check audits, placing contractors under closer scrutiny; therefore, contractors must establish effective internal procedures for time recording and labor classification.
Pooling errors trigger audits, particularly mixing direct and indirect costs or inconsistently applying allocation bases. Contractors must align their actual billing practices precisely with the disclosed cost accounting methods to avoid CAS non-compliance and potential payment holds.
Documentation lapses, especially regarding subcontractors, consultants, and travel expenses, frequently result in questioned costs. FAR 31.205 requires thorough supporting documentation for these expenditures, clearly outlining agreements, invoices, and work products. Maintaining organized records eases auditors’ concerns and lowers potential cost disallowances.
Contractors utilizing outsourced accounting services must carefully evaluate their providers’ capabilities, particularly their experience supporting DCAA-compliant practices. Effective providers offer detailed system readiness assessments, proven ICE submission capabilities, integrated labor capture platforms, timely indirect rate modeling, and disciplined audit-response protocols.
Staying Ready Across Every Contract Type
DCAA compliance requirements shift based on the contract structure, pricing model, and oversight level; however, the consistent need for disciplined systems, accurate data, and timely submissions remains unchanged.
Diener & Associates has guided contractors through every phase of DCAA compliance for over three decades. Our team of experienced CPAs delivers reliable, audit-ready support across all major touchpoints, including accounting system setup, ICE package development, labor capture, provisional billing, and more.
Schedule a consultation online or call 1-(703)-386-7864 to speak directly with our team about aligning accounting practices with DCAA expectations.