Defense Contract Audit Agency (DCAA)

The Defense Contract Audit Agency (DCAA) is an independent agency within the Department of Defense that provides audit and financial advisory services to DoD contracting officers and other government agencies, evaluating whether contractor costs are allowable, allocable, and reasonable.

What is DCAA?

DCAA was established in 1965 to provide independent, professional contract audit services across the defense acquisition system. The agency employs approximately 4,000 auditors who conduct thousands of audits annually across the defense industrial base. While DCAA serves primarily DoD, other federal agencies frequently request DCAA audit support for complex cost-type contracts, making DCAA's scope effectively government-wide for cost accounting matters.

DCAA's primary audit areas include: pre-award accounting system reviews (assessing whether a contractor's accounting system meets government adequacy requirements before cost-type contracts are awarded), incurred cost audits (examining the actual costs charged to government contracts for allowability under FAR Part 31), forward pricing rate reviews (evaluating contractor-proposed indirect rates for future contracts), and special purpose audits (investigating specific fraud indicators, billing system adequacy, or compliance with CAS).

The accounting system adequacy determination is particularly consequential for contractors pursuing cost-type contracts. DCAA evaluates whether the contractor can properly segregate direct and indirect costs, allocate costs consistently, maintain adequate timekeeping records, and produce reliable cost data. A "significant deficiency" finding in an accounting system audit can block award of cost-type contracts until deficiencies are corrected. For contractors entering the cost-type contracting space, building a DCAA-adequate accounting system before pursuing those contracts is essential.

Why DCAA matters for government contractors

DCAA audits are not optional and can result in cost disallowances, repayment demands, and referrals to the Inspector General or Department of Justice for False Claims Act investigation. Contractors on cost-type contracts - cost-plus-fixed-fee, cost-plus-incentive-fee, time-and-materials - live under ongoing DCAA scrutiny through annual incurred cost submissions. Understanding allowable versus unallowable costs (FAR Part 31), maintaining compliant timekeeping, and building accounting systems that can withstand audit scrutiny are fundamental requirements for any contractor pursuing cost-type defense work.

Example

A mid-size defense engineering firm transitions from firm-fixed-price work to a large cost-plus-fixed-fee development contract. Before award, the contracting officer requests a DCAA pre-award accounting system survey. DCAA auditors review the firm's accounting software configuration, job costing procedures, indirect rate pool structure, timekeeping system, and cost segregation practices. The firm's accounting system receives an "adequate" determination with two minor recommendations. The contracting officer proceeds with award. Eighteen months later, DCAA conducts an incurred cost audit of the firm's first annual incurred cost submission, identifying $45,000 in costs the auditors classify as unallowable (including certain entertainment expenses and a portion of marketing costs allocated to the government). The firm's contracts administrator negotiates the disallowance, agrees to credit the government, and adjusts its indirect rate calculation to exclude the questioned categories going forward.

Frequently Asked Questions

What is an incurred cost submission and when is it required?

An incurred cost submission (ICS) is an annual financial report that contractors must submit for cost-type contracts, documenting all actual costs incurred during the fiscal year and comparing them to the billing rates used throughout the year. It is required by FAR 52.216-7 for contractors with cost-type contracts and must be submitted within six months of the contractor's fiscal year end. DCAA audits the submission to verify cost allowability and correct any over- or under-billing of indirect rates.

Does DCAA audit all federal contracts or only DoD contracts?

DCAA's primary mandate is DoD contracts, but other federal agencies (GSA, NASA, DHS, HHS, and others) frequently request DCAA audit services for their complex cost-type contracts. DCAA can decline non-DoD audit requests based on capacity, but in practice provides audit support across the federal government for significant cost-type contracts. Civilian agency contractors may thus encounter DCAA audits on non-DoD work.

What is a DCAA-compliant accounting system?

A DCAA-compliant (or DCAA-adequate) accounting system is one that can properly segregate direct costs from indirect costs, consistently allocate costs to contracts, maintain accurate timekeeping records that can be cross-referenced to contract activities, produce reliable financial data for cost reporting, and track costs against contract budgets. The DCAA audit program evaluates 18 specific adequacy criteria. Commercial accounting software can be configured to meet these criteria, but the configuration must be verified - software purchase alone does not ensure adequacy.

Can a contractor dispute a DCAA audit finding?

Yes. DCAA issues audit reports with findings and recommendations, but the contracting officer - not DCAA - makes the final determination on cost allowability. A contractor who disagrees with DCAA's audit findings presents its position to the contracting officer, who reviews the contractor's arguments alongside DCAA's report and makes an independent determination. Contractors can request a formal meeting with DCAA to discuss audit findings before the final report is issued, which is often more effective than disputing findings after the fact.