DCAA Audit Survival Guide: 7 Compliance Areas Where Contractors Get Hit

Why DCAA Audits Matter More Than You Think

The Defense Contract Audit Agency (DCAA) audits cost and pricing data on federal contracts to protect the government from overpayment. For contractors, DCAA findings translate into disallowed costs, price reductions, repayment demands, and — in serious cases — False Claims Act exposure. Even routine audits create months of work and the risk of compliance findings that follow your firm into future negotiations.

The frustrating reality: most DCAA findings are preventable. Across 20+ years of federal compliance work, the same seven gaps account for the majority of audit damage. This guide walks through each one, what triggers the finding, and how to defend against it before the auditors show up.

This article is general guidance, not legal or accounting advice. For your specific situation, consult your CFO, audit committee, or counsel.

Gap 1: Timekeeping

Timekeeping is the single most common source of DCAA findings on T&M and cost-reimbursement contracts. The standard DCAA expects:

• Daily timekeeping — entries the same day the work is performed, not retrospective end-of-week reconstruction
• Direct vs indirect segregation — every hour coded to a specific cost objective (contract/task or indirect pool)
• Supervisor approval — supervisor signs off on subordinate timecards
• Audit trail — changes to timesheets are tracked with date, prior value, and reason

What gets contractors in trouble:

• Weekly reconstruction (worker fills in Monday's hours on Friday)
• Generic "G&A" charging when the work is actually contract-direct
• Salaried employees not tracking time at all
• Hours allocated by formula rather than actual work

The fix: a compliant timekeeping system with daily entry enforcement, supervisor workflow, and a clear policy that all employees follow regardless of pay structure. Several commercial systems are DCAA-compliant out of the box. Whatever you use, document your process and train every new hire on day one.

Gap 2: Indirect Cost Rates

Indirect rates — fringe, overhead, G&A — are how contractors recover costs that aren't directly attributable to a specific contract. DCAA scrutinizes both the structure of your indirect rate pools and the allocation base used.

Common findings:

• Misclassified costs — direct costs charged to indirect pools (or vice versa)
• Inadequate allocation base — using direct labor dollars when direct labor hours would be more equitable, or vice versa
• Single base, multiple pools — primes with diverse cost centers using a single allocation base when separate bases would be more appropriate
• Unallowable costs in allocation base — including items that FAR 31 deems unallowable (e.g., entertainment, alcohol, political contributions, fines)

The fix: an annual indirect cost rate review. Map every G/L account to allowable/unallowable per FAR Part 31. Document your allocation methodology in writing. If you're CAS-covered, see Gap 4.

Gap 3: Wrap Rate Calculation

A wrap rate is the multiplier applied to direct labor cost to recover indirect costs and profit. Competitive federal services wraps typically range 1.4 to 1.8. Wrap rate accuracy matters for both pricing competitiveness (see our GSA Benchmarker tool) and audit defensibility.

Common audit findings:

• Wrap rates that don't tie to general ledger — the rate proposed on a bid doesn't match the rate produced by your accounting system
• Selective wrap application — using a lower wrap for competitive bids and a higher one for incumbent recompetes, with no documented justification
• Forward pricing rates that exceed historical actuals — projecting higher rates than your books support

The fix: maintain a Forward Pricing Rate Agreement (FPRA) with DCAA if you have substantial cost-type work. Tie every wrap rate proposed on any bid back to the FPRA or your most recent audited indirect rate. Document any deviation.

Gap 4: Cost Accounting Standards (CAS) Compliance

CAS applies to negotiated contracts over $2M when the contractor is otherwise CAS-covered. See FAR 52.230-2 for the contract clause. There are 19 CAS, of which the most-cited in audits:

• CAS 401: Consistency in estimating, accumulating, and reporting costs
• CAS 402: Consistency in allocating costs incurred for the same purpose
• CAS 405: Accounting for unallowable costs
• CAS 410: Allocation of G&A
• CAS 418: Allocation of direct/indirect costs

Common findings:

• Inconsistent application of cost accounting practices across contracts — using one approach on Contract A and a different approach on Contract B for the same type of cost
• Failure to file a Disclosure Statement when the contractor crosses the trigger threshold
• Practice changes without cost impact analysis — changing how you allocate a cost without analyzing whether the change advantaged or disadvantaged the government

The fix: file your Disclosure Statement when triggered. Maintain a documented practice for every cost category. When practices change, perform the cost impact analysis before implementing. CAS noncompliance can result in price adjustments equal to the cost impact — easily six figures on a substantial contract.

Gap 5: Incurred Cost Submissions (ICS / ICE)

Cost-reimbursement contractors must submit an Incurred Cost Submission within six months after the end of each fiscal year (with extensions available). The ICS reconciles claimed indirect rates to actual costs and is the basis for final settlement of cost-type contracts.

Common findings:

• Late or missing submissions — DCAA has discretion to disallow costs when ICS is overdue
• Unallowable costs claimed — costs that should have been removed per FAR 31 still appear in the submission
• Inadequate documentation — claims that cannot be supported by underlying records
• Inconsistent rates across years — rates claimed don't reconcile to prior submissions or to current contract bids

The fix: build ICS preparation into your year-end close calendar. The first three months after year-end should produce the draft ICS; the next three should validate and submit. Use the DCAA ICE model template — it organizes the data in the format DCAA reviews.

Gap 6: Accounting System Adequacy (SF 1408)

DCAA's Standard Form 1408 lists the criteria for an "adequate" accounting system: a prerequisite for award of cost-reimbursement contracts. The criteria include:

1. Segregation of direct from indirect costs
2. Identification and accumulation of direct costs by contract
3. Logical and consistent indirect cost allocation
4. Accumulation of costs under general ledger control
5. Timekeeping system that identifies direct vs indirect labor
6. Labor distribution that charges direct/indirect labor to appropriate cost objectives
7. Interim cost determination at least monthly
8. Identification of costs by contract line item
9. Identification of pre-contract costs separately
10. Records to support proposals of future contracts

Common deficiencies:

• Inability to produce contract-level cost reports on demand
• Manual labor distribution rather than systematic
• No monthly interim cost reports
• Pre-contract costs commingled with awarded contract costs

The fix: a SF 1408 self-assessment before any cost-type contract pursuit. If you have gaps, address them before submitting an offer that requires SF 1408 adequacy. Several commercial accounting systems (Deltek Costpoint, Unanet, JAMIS) are designed to meet these criteria out of the box.

Gap 7: Truth in Negotiations Act (TINA) / Truthful Cost or Pricing Data

TINA applies to negotiated contracts over the threshold (currently $2M) when no exception applies. See FAR 52.215-20. Contractors must submit certified cost or pricing data, and that data must be "accurate, complete, and current" as of the agreement date.

Common findings — collectively called "defective pricing":

• Outdated cost data — quotes from suppliers that have since been updated
• Withheld discounts — supplier discounts the contractor knew about but didn't reflect
• Inconsistent estimating — using different estimating methods for the same component on different bids
• Subcontractor data gaps — failing to obtain certified data from subs over the TINA threshold (see FAR 52.215-12)

The fix: a defective pricing playbook. Designate a Cost & Pricing lead for every TINA-covered proposal. Require sub-cost data 30 days before government negotiation. Sweep your own records 7 days before final pricing to catch anything that has changed since the initial submission. Document everything — TINA defense rests on showing you exercised reasonable diligence.

When to Get External Help

DCAA findings can be defended, mitigated, or settled — but the time to engage external compliance expertise is before the audit, not after. Specifically:

• Before submitting an ICS — a 90-day pre-submission review by an experienced compliance firm typically identifies $50K-$500K in defensible cost adjustments
• Before a CAS practice change — the cost impact analysis is non-trivial and worth professional review
• Before submitting a forward pricing rate proposal — these become reference points for years of negotiations
• When an audit finding is issued — formal response timelines are short; don't let them lapse

How Aliff Helps

Aliff's compliance advisory helps small and mid-size federal contractors prepare for DCAA audits, defend against findings, and build the systems that prevent issues from arising. Specifically:

• DCAA audit preparation reviews
• Indirect rate structure design and documentation
• Wrap rate competitive analysis (see GSA Benchmarker)
• CAS Disclosure Statement preparation and updates
• ICS pre-submission review

Schedule a compliance review to map your current posture against the seven gaps above.

Further Reading

• FAR 52.215-20 Requirements for Certified Cost or Pricing Data
• FAR 52.215-12 Subcontractor Certified Cost or Pricing Data
• FAR 52.230-2 Cost Accounting Standards
• GovCon Wrap Rate Calculation Guide
• Compliance & CMMC Readiness