The Defenses Contract Audit Agency (DCAA) provides audit and financial advisory services to the DoD and other federal entities responsible for acquisition and contract administration. DCAA operates under the authority, direction, and control of the Under Secretary of Defense (Controller)/Chief Financial Officer. The Agency’s primary function is to conduct contract audits and related financial advisory services.

If your company is awarded a cost-reimbursement type of federal contract, you should be concerned about DCAA audits, regardless of the size of your company. Even a small business can be subject to DCAA audits, especially when awarded a federal contract containing the 52.216-7 Allowable Cost and Payment clause.

Small businesses are not exempt from DCAA audits if awarded a cost-reimbursement or time and materials type of federal contract, especially one with the 52.216-7 Allowable Cost and Payment clause.

No, federal contracts of any size can be audited by DCAA if they are cost-reimbursement or time and materials types of federal contracts. Many contractors need clarification on the contract size threshold for Cost Accounting Standards (CAS), which exempts small businesses and small contracts from Cost Accounting Standards.  This is different from the jurisdiction of DCAA auditors, which includes small contracts and small businesses.

Yes, subcontracts issued by federal prime contractors to subcontractors are subject to DCAA audit if the prime contract and subcontract is a cost-reimbursement or time and materials type of federal contract. Even small subcontractors with no prime contracts can be subjected to DCAA audits. Many small contractors incorrectly believe their small size exempts them from DCAA audits if they have no prime contracts.

A pre-award system survey is an accounting system review performed by DCAA before awarding a cost-reimbursement type of federal contract, and if not found to be acceptable, usually means the loss of the contract. The contractor must demonstrate that its accounting system, as designed and implemented by the contractor, segregates direct costs from indirect costs, computes indirect rates, fairly allocates indirect expenses to cost objectives and contracts, reconciles labor distribution costs to the timekeeping and payroll system, reconciles job costs to the general ledger, tracks contract backlog, segregates unallowable costs, and is in accordance with generally accepted accounting principles.

DCAA performs a voucher audit at the request of the contracting officer to verify the amounts and quantities billed to the federal government by the contractor. Voucher audits are most frequently performed on cost-reimbursement and time and materials federal contracts.