The Pre-Audit Checklist Every Government Contractor Should Tackle Before Year-End

For government contractors, audit season isn’t a surprise.

Whether you’re preparing your Incurred Cost Submission (ICS), reconciling provisional rates, or reviewing contract performance, October and November are the sweet spot for getting your financial house in order before DCAA or the IRS comes calling.

At CPA Department, we work with dozens of GovCon clients who find themselves scrambling after the holidays. However, the window for easy corrections, proactive planning, or stress-free submissions is shrinking fast by then.

This checklist is your year-end financial tune-up. Whether you’re a first-time prime or scaling into CAS-covered territory, here’s what we recommend getting done before the end of Q4.

1. Reconcile Actuals to Your Provisional Billing Rates

Most contractors bill using provisional indirect rates throughout the year, but your actual costs may tell a very different story by year-end.

Ask yourself:

• Are my fringe, overhead, and G&A rates aligned with actual expenses?
• Did I over- or under-recover costs across my projects?
• Have I documented the variance and updated my rate assumptions?

Under-recovery eats into profit. Over-recovery can trigger refunds or worse, clawbacks during DCAA audits.

2. Review Unallowable Costs for FAR Compliance

DCAA auditors love to start here. Under FAR Part 31, certain expenses are never reimbursable under federal contracts, including:

• Alcohol, entertainment, and donations
• Lobbying or marketing to influence federal awards
• Fines and penalties
• Personal use of vehicles or equipment

Go through your chart of accounts. If you haven’t clearly segregated unallowables or the lines are blurry, this is the time to clean it up.

Pro tip: Create a dedicated unallowable cost pool to track expenses you know aren’t billable but still impact your bottom line.

3. Confirm Your Supporting Documentation

If you’re going to stand up to audit scrutiny, your records need to speak for themselves. That means:

• Timesheets with proper approvals and audit trails
• Subcontractor agreements and rate justifications
• Invoices with backup for all line items
• Cost allocation memos and methodology documentation
• Copies of all modifications and contract changes

Think like an auditor: Could someone unfamiliar with your business review your files and easily trace every cost?

4. Run a Mid-Contract Health Check

If you’re mid-performance on a multi-year contract, now is the time to assess whether:

• Your budget burn aligns with your forecast
• You’re tracking actuals to estimate-to-complete (ETC)
• Staffing plans match labor category billing assumptions
• Subcontractors are billing in line with their agreements

If your pricing is off, your cost realism and future CPARs are at risk.

5. Start Your Incurred Cost Submission (ICE) Prep Early

The ICS isn’t due until six months after your fiscal year ends, but don’t wait until spring.

Now is the time to:

• Ensure your accounting system aligns with the DCAA ICE model
• Populate and test key schedules like Schedule B (Direct Costs by Contract) and Schedule H (Indirect Cost Rates)
• Flag any discrepancies between your general ledger and ICE requirements
• Schedule a dry run with your CPA

ICE submissions are audit magnets. Submitting a clean, defensible package is your best insurance policy for a low-stress DCAA review.

6. Evaluate Indirect Rate Trends Before Setting Budgets

As you begin next year’s budget cycle, you’ll likely revisit forward pricing and indirect rates.

Before you lock in next year’s rates:

• Review historical rate performance
• Forecast for changes in staffing, facilities, or overhead
• Ensure your assumptions match your growth strategy and contract pipeline
• Consider preparing a Forward Pricing Rate Proposal (FPRP) for new bids

 A good FPRP must be DCAA-ready and use a competitive advantage when bidding.

7. Conduct a Mock Audit (Or At Least a Self-Check)

If you haven’t undergone an internal compliance review this year, now is the time.

A GovCon CPA can help you:

• Simulate a DCAA audit
• Identify documentation gaps
• Test the adequacy of your accounting system under SF1408 standards
• Prepare your team for inquiries or Evaluation Notices (ENs)

During an audit, you don’t rise to the occasion, but fall to the level of your systems.

Year-End Is Your Strategic Edge

Waiting until January puts you in reactive mode, trying to fix last year’s problems while planning for the new one.

Instead, use October and November to:

• Clean up documentation
• Align rates with reality
• Validate your accounting systems
• Prepare for audits and proposal season
• Protect your profit

Don’t just check compliance off your list. Use it as leverage. It builds trust with contracting officers, strengthens your proposals, and gives you the confidence to scale.

CPA Department helps GovCon leaders take control of their compliance strategy before DCAA knocks. Whether you need help reviewing your ICE model, validating rates, or preparing for SF1408, we’re here to support you.

Let’s close the year strong. Book a year-end audit readiness review today.