What is the DCAA? All You Need To Know as a Government Contractor


The DCAA, or Defense Contract Audit Agency, provides audit and financial advisory services to the DoD and other federal entities responsible for acquisition and contract administration to ensure the government gets the best value for every dollar it spends on defense contracting. DCAA operates under the authority, direction, and control of the Secretary of Defense (Comptroller)/Chief Financial Officer.

The DCAA’s primary function is to conduct contract audits. Contract audits  are conducted by DCAA to ensure Federal Acquisition Regulations and contract terms and conditions are being met by defense contractors. Through its audits, the DCAA determines whether contractor-reported costs are:

  • Allowable
  • Allocable
  • Reasonable

The DCAA maintains the Defense Contract Audit Manual (DCAM) which details processes and procedures for government contract audits of contracts awarded by DOD and civilian agencies.

Who needs to be DCAA compliant?

Government Contractors

Any business seeking or performing government contracting work must establish DCAA and FAR compliance. A government contractor will be subject to DCAA audits periodically, and  to pass DCAA audits with a clean opinion, a contractor’s business processes and accounting system must be DCAA compliant.

Government Subcontractors

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. Small subcontractors with no prime contracts can indeed be subject to DCAA audits.

DCAA compliance requirements

A company is DCAA Compliant when:

  • Their written cost accounting policies regarding the treatment of their costs are adequate and correct.
  • Their written procedures describe the correct treatment and steps to take with those costs.
  • Their actual cost accounting practices follow their stated policies and procedures.

DCAA audits of costs test compliance in 3 areas:

  1. The allowability of costs: Cost principles found in Part 31 of the Federal Acquisition Regulation (FAR) detail what types of costs are allowable and can be passed on to the government either as direct or indirect charges to a contract, and which costs are unallowable and may not be charged to the government.
  2. The allocability of costs:  A cost is allocable to a government contract if it is incurred specifically for the contract, benefits both the contract and other work and can be distributed in reasonable proportion to the benefits received, or is necessary to the overall operation of the business.
  3. The reasonableness of costs:  A cost is reasonable if it meets the needs of the performance of the contract.

DCAA audit programs

DCAA audits DoD contract awards, but they also perform audits for civilian agencies like DHS, DOE, EPA, NASA, and the VA.

Every audit performed by DCAA, whether for the DOD or a civilian agency, follows a written audit program. That program specifies every step of the audit process from contractor notification to reporting requirements with internal guidance for auditors. Even when civilian agencies contract with commercial auditing firms, they require adherence to DCAA’s audit programs.

For guidance, government contractors should consult the Directory of Audit Programs when notified the DCAA will be conducting an audit of a contract. The program details each step of the audit, along with the data and reporting contractors need to prepare for auditors.

What triggers a DCAA audit?

When not required by established procedures, DCAA audits are triggered by a request from a contracting officer or an administrative contracting officer from a federal entity. DCAA does not perform audits requested by contractors.

How long will a DCAA audit take?

DCAA auditors have 1 year from the date of the submission to complete an audit, but most are completed sooner. A small contract may only have one auditor, while audits for larger contracts are performed by a team of auditors to ensure the 1 year deadline is met.

How to pass a DCAA audit?

Ensure your accounting system aligns with FAR Subpart 16.3 and charges the government only for direct costs of the contract and a reasonable share of the contractor’s indirect costs.

If you need expertise or help understanding DCAA contract audits, please contact us.

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