This guide explains what DCAA compliance means for government contractors, covering what the Defense Contract Audit Agency does, the types of audits it conducts, and the consequences of noncompliance.
Why it matters: Failing a DCAA audit can result in disallowed costs, contract termination, or criminal penalties—making audit readiness a core business risk, not just a finance function.
Key Takeaways
- DCAA compliance is about audit readiness, not certification: The DCAA does not certify contractors as compliant—it means your business systems, accounting, and cost-tracking practices meet federal standards.
- Non-compliance carries serious financial and legal consequences: Penalties are assessed per violation and can reach three times the damage amount; criminal penalties include potential imprisonment for individuals who signed false certifications.
- Purpose-built ERP software reduces DCAA audit risk: Deltek Costpoint is built for government contractors, with integrated timekeeping, cost-tracking, and reporting designed to meet DCAA requirements from day one.
What is the DCAA?
It is in the government's best interests—on ethical, practical, and political levels—to ensure that funds are spent properly. One way it ensures contractors spend money appropriately is through audits. These audits are meant to determine whether contract costs are allowable, allocable, and reasonable.
The Defense Contract Audit Agency (DCAA) performs contract auditing for the DoD and certain other federal agencies. The scope of the DCAA's influence is significant. That's because the DCAA provides definitive recommendations to contracting officers that affect negotiations with nearly 7,500 contractors in a typical year. Contracting officers are then better able to negotiate prices and settle contracts for services and supplies using DCAA recommendations.
The DCAA has no direct role in determining which companies are awarded defense contracts; instead, it provides recommendations to the government officials who first select contractors to perform government-funded work and then negotiate prices accordingly for the products and services offered. The DCAA audits only contractors; it has no internal audit responsibilities for the DoD.
What is DCAA Compliance?
The phrase “DCAA compliance” is widely used in the contracting industry, but the agency does not actually certify contractors as "compliant."
Being DCAA compliant means following the agency’s recommendations and guidance so that you remain compliant with federal law and are prepared for audits.
It also means that your business systems are compliant with DCAA's requirements. For instance, your accounting system should be able to track costs separately, including direct and indirect costs, accounting costs, billing costs, and labor costs. Ideally, it should be fully integrated with your timekeeping system and be able to track all the reports DCAA wants to see during an audit.
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Your Guide to Understanding DCAA Compliance
Learn what the DCAA does, what types of audits it carries out, and how to get and stay compliant.
Types of DCAA Audits
The DCAA performs a number of types of audits, including forward pricing, special audits, incurred cost, pre-award, and other audits. Contracting officers may also request an independent financial opinion on specific elements of a contract, in addition to an assessment of compliance with specific acquisition regulations or contract terms, a contractor's business system, and the like. The DCAA typically categorizes these types of requests as "special" or "other" audits.
Forward Pricing
Forward pricing audits are generally completed before contract award. The DCAA evaluates a contractor's estimate of the cost to the contractor of providing goods or services to the government.
Special Audits
Special audits can be conducted before or after contract award. Most of the reports in this category are issued in response to contracting officer requests. In these instances, contracting officers need an independent financial opinion on specific contract elements or a contractor's accounting business system to proceed with the contract work, making special audits a high priority.
Incurred Cost
Incurred cost audits determine the accuracy of a contractor's annual allowable cost representations. When a contract price is not fixed, the DCAA conducts an incurred cost audit after contract award to assess the accuracy of the contractor's cost representations.
Pre-award Surveys
Many small businesses are affected by DCAA Standard Form (SF) 1408 pre-award surveys.
The major objectives of this audit are to gain an understanding of the contractor's accounting system, complete the SF 1408 form, Pre-Award Survey of Prospective Contractor (Accounting System), and form an opinion on whether the contractor's system design is acceptable for the award of a government contract. Contractors that are audited must be able to demonstrate their accounting system to the auditor and implement it before incurring any costs on a contract.
Other Audits
Other audits primarily consist of audits performed after contract award, and can be requested by a contracting officer or initiated by the DCAA. The DCAA typically initiates this type of audit when there is a high risk, such as when the contractor has inadequate business systems.
DCAA Compliance and FAR & CAS
DCAA audits are driven by the rules outlined in the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS), and system requirements. The primary method of tracking where government money goes is by accounting processes, so it is particularly important that contractors perform scrupulous accounting.
Here are the three areas where contractors need to be compliant with DCAA standards:
- Federal Acquisition Regulation (FAR): The FAR provides federal agencies with overarching guidance on audits, including a set of consistent, uniform policies and procedures for the federal acquisition process.
- Cost Accounting Standards (CAS): Many DoD contractors (with a complex set of exceptions) must comply with the CAS, which are meant to create consistency in pricing and accounting practices.
- Timekeeping & Labor Charging System Requirements: Contractors must also establish timekeeping procedures and use an automated timekeeping system.
Go Deeper
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Federal Acquisition Regulation (FAR): A Guide for GovCons
Get an overview of the Federal Acquisition Regulation and what it means for government contractors with this concise guide.
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Cost Accounting Standards (CAS): A Guide for Government Contractors
Get an overview of the Cost Accounting Standards (CAS) and what it means for government contractors with this guide.
Consequences of Noncompliance
Every contractor is responsible for complying with all applicable government rules and regulations. Misconduct could be exposed by a whistleblower, an audit, an investigation, a Freedom of Information Act (FOIA) request, or other means. The consequences of illegal and unethical conduct or noncompliance can include suspension, debarment, voided or terminated contracts, listing in the Excluded Parties List System (EPLS), and criminal and civil penalties.
Civil and Criminal Penalties
Civil penalties for noncompliance are determined per violation, per invoice. The government can recoup thousands of dollars, and the contractor risks paying the government up to three times the damage. Criminal penalties are much more serious—up to several years of imprisonment for whoever signed the certificate of cost and pricing data.
Debarment
Debarment is one of the most serious punishments the federal government can impose on a contractor. A contractor can be debarred for committing fraud in obtaining or performing a contract, violating antitrust laws, or committing a number of other offenses. A debarment from one agency has government-wide effects. Solicitation bids and proposals from debarred contractors cannot be considered unless the agency head determines a compelling reason to do so in writing.
Voided or Terminated Contracts
The FAR gives agencies the ability to void and rescind contracts for which there has been:
- Final conviction for bribery, conflict of interest, disclosure, or receipt of contractor bid or proposal information
- Final conviction of source selection information in exchange for either a thing of value or to give anyone a competitive advantage
Get DCAA Compliant With Deltek
Are you prepared for the accounting, compliance, proposal, and contract management demands you'll face as a contractor? Do you have the systems in place that you'll need?
Start by leveraging Deltek Costpoint, the industry-leading ERP for government contractors, to maximize business performance and realize better project results—all while incurring fewer risks and reducing.
