DCAA Audits & DCMA Administration — Who Checks Your Costs
Also known as: Defense Contract Audit Agency, Defense Contract Management Agency, incurred cost audit, ACO
What you do here: Know which organization is asking, what it can decide, and what it can only recommend
At a Glance
- Who it applies to
- Contractors with cost-type, T&M, or cost-priced work; DCAA is the audit organization for DoD and audits for many civilian agencies by agreement
- What DCAA does
- Audits and advises — preaward accounting system surveys, forward pricing proposals, incurred cost, floor checks, and defective pricing
- What DCMA does
- Administers contracts through an administrative contracting officer (ACO) who makes determinations, negotiates rates, and issues demands
- Governing authority
- FAR Subpart 42.1 (contract audit services), FAR 42.101 (contract audit responsibilities), FAR Subpart 15.4 (pricing audits)
- The stakes
- An audit report is a recommendation; the contracting officer's determination is what creates a debt or a disallowance
What It Is
Two different organizations show up in a contractor's cost life, and confusing them leads people to argue with the wrong party. The Defense Contract Audit Agency performs contract audits and provides accounting and financial advisory services to contracting officers — for the Department of Defense, and for many civilian agencies under interagency arrangements. DCAA's work products are audit reports containing findings and recommendations: questioned costs, unsupported costs, opinions on the adequacy of an accounting system, opinions on the adequacy and reasonableness of a price proposal. DCAA does not disallow costs, does not assess penalties, and does not decide whether your accounting system is adequate for award. The Defense Contract Management Agency, by contrast, administers contracts. Its administrative contracting officer holds delegated authority under FAR Subpart 42.3 to perform contract administration functions — including establishing billing rates, negotiating and settling final indirect cost rates, making determinations on questioned costs, issuing demands for contract debts, and determining whether an accounting system is acceptable. For civilian agency work, the buying agency's contracting officer or a designated administration office plays the equivalent role. The audits you are likely to encounter are a short list. A preaward accounting system survey tests SF 1408 adequacy before a cost-type award. A forward pricing proposal audit examines a cost proposal above applicable dollar thresholds for adequacy and reasonableness. An incurred cost audit examines a submitted final indirect cost rate proposal — many small submissions are risk-assessed and accepted with limited review rather than fully audited. Floor checks test timekeeping in operation. A defective pricing audit examines whether certified cost or pricing data was accurate, complete, and current as of the certification date. The practical implication of the audit/decide split is procedural: when you disagree with an audit finding, the productive path is to respond in writing to the audit report — and then make your case to the contracting officer who will actually decide, because until a contracting officer acts, a questioned cost is only a recommendation.
When It Applies
- Before award of a cost-type contract, through a preaward accounting system survey.
- During proposal evaluation, when a cost proposal above the applicable threshold is referred for a pricing audit.
- Annually, when your incurred cost submission is risk-assessed and possibly audited.
- Unannounced, when floor checks test timekeeping and labor charging in operation.
- After award, when a defective pricing review examines certified cost or pricing data you submitted.
- At rate settlement, when the ACO negotiates final indirect cost rates with the audit report in hand.
Key Features
| Feature | What It Means |
|---|---|
| DCAA audits, the CO decides | Audit reports contain findings and recommendations. Only a contracting officer can disallow a cost, assess a penalty, or create a debt. |
| The ACO is your rate counterparty | An administrative contracting officer — often at DCMA — establishes billing rates, negotiates final rates, and issues determinations and demands. |
| Risk-based coverage for small submissions | Lower-dollar, lower-risk incurred cost submissions are commonly accepted through risk assessment rather than a full audit. |
| Access to records is broad | The Allowable Cost and Payment and audit clauses give the government access to records supporting claimed costs; obstruction is its own problem. |
| Questioned vs. unsupported costs | 'Questioned' means the auditor believes the cost is unallowable; 'unsupported' means the documentation wasn't there. The second is often curable with records. |
| Written response is a real remedy | You are entitled to respond to draft findings, and a documented rebuttal frequently resolves items before they reach the contracting officer. |
The SDVOSB Angle
Small SDVOSBs consistently over-fear DCAA and under-prepare for it. The over-fear shows up as firms avoiding cost-type work entirely because they imagine a permanent auditor in the lobby; in reality a small contractor's exposure is usually a preaward survey once, an occasional floor check, and an annual incurred cost submission that is often accepted through risk assessment without a full audit. The under-preparation shows up in how firms respond when an audit does happen: treating an auditor's information request as an adversarial event, answering verbally, missing the response window on draft findings, and then discovering that a recommendation they could have rebutted has become a contracting officer's determination and a debt. Three habits fix most of it. Designate one person as the audit point of contact so requests are tracked and answered consistently in writing. Respond to every documentation request with actual records rather than explanations — a large share of findings are 'unsupported' rather than 'unallowable,' and those are cured with paper. And escalate to the contracting officer or ACO at the right moment, because the ACO — not the auditor — is the party who will decide, negotiate your rates, and sign the rate agreement. It also pays to know who your cognizant ACO is before you need them; a firm that has never spoken to the official who will settle its rates is negotiating from a standing start.
How to Comply
- Identify your cognizant contract administration office and ACO early, and open a working relationship before rate settlement.
- Designate a single audit point of contact and keep a log of every request, response, and document provided.
- Answer requests with documents rather than narrative — the difference between 'unsupported' and 'supported' is usually paper you already have.
- Respond in writing to draft audit findings within the window offered; silence converts a debatable finding into an accepted one.
- Keep your accounting policies, timekeeping policy, and rate workpapers current and retrievable — auditors ask for them first.
- When you disagree after the report is final, make the argument to the contracting officer or ACO who has decision authority.
- Prepare employees for floor checks by making sure they genuinely understand the timekeeping policy — not by coaching answers.
Watch Out For
- Arguing the merits with an auditor as though they can grant relief — they can only recommend; the contracting officer decides.
- Missing the response window on draft findings, which forfeits the cheapest opportunity to fix a mischaracterization.
- Providing verbal explanations where records are requested; unsupported costs are questioned costs.
- Assuming an accepted incurred cost submission is permanently closed — prior years can be examined later.
- Treating a floor check as an intrusion, or coaching employees, which converts an accounting question into an integrity question.
- Not knowing who your ACO is until the day the rate settlement or the demand letter arrives.
Run the Numbers
Frequently Asked
What is the difference between DCAA and DCMA?
The Defense Contract Audit Agency performs contract audits and provides accounting and financial advisory services to contracting officers; its output is an audit report with findings and recommendations, such as questioned costs or an opinion on accounting system adequacy. The Defense Contract Management Agency administers contracts; its administrative contracting officers hold delegated authority under FAR Subpart 42.3 to establish billing rates, negotiate and settle final indirect cost rates, determine whether costs are allowable, and issue demands for contract debts. In short: DCAA recommends, the contracting officer decides.
Can DCAA disallow my costs?
No. DCAA questions costs and reports its findings, but only a contracting officer — commonly an administrative contracting officer for cost and rate matters — can actually disallow a cost, assess a FAR 42.709 penalty, or establish a contract debt. That distinction is practically important: an audit report is not self-executing, and if you disagree with a finding you should respond to the draft report in writing and then make your case to the contracting officer who holds decision authority, rather than treating the auditor's conclusion as final.
What kinds of DCAA audits will a small contractor actually see?
For most small businesses the realistic list is short: a preaward accounting system survey using the SF 1408 criteria before a first cost-type award; occasional unannounced floor checks testing timekeeping; an annual incurred cost submission that is risk-assessed and, for lower-dollar low-risk submissions, frequently accepted without a full audit; a forward pricing proposal audit if you submit a large cost proposal; and a defective pricing review if you submitted certified cost or pricing data. A small contractor typically does not experience continuous on-site audit presence.
What is the difference between a questioned cost and an unsupported cost?
A questioned cost is one the auditor believes is unallowable, unallocable, or unreasonable under the applicable cost principles or contract terms. An unsupported cost is one for which the contractor did not provide documentation adequate to demonstrate that it meets those criteria. The distinction matters because unsupported costs are frequently curable — producing the invoices, timesheets, contracts, or approvals resolves them — whereas a questioned cost requires a substantive argument about allowability. Because FAR 31.201-2(d) puts the documentation burden on the contractor, unsupported costs are treated much like unallowable ones until the records appear.
Primary Sources
- FAR Subpart 42.1 — Contract Audit Services
- FAR 42.101 — Contract audit responsibilities
- FAR Subpart 42.3 — Contract Administration Office Functions
- FAR 15.404-2 — Data to support proposal analysis (field pricing)
- FAR 52.216-7 — Allowable Cost and Payment (clause)
Plain-English reference, not legal, accounting, or tax advice. Cost allowability and accounting determinations are fact-specific, and the FAR, the Cost Accounting Standards, and the statutory dollar thresholds quoted here are amended and escalated for inflation over time. Always read the current FAR text and the cost and payment clauses in your specific contract, confirm the applicable thresholds and your accounting treatment with the contracting officer or cognizant administrative contracting officer, and consult a qualified government-contract accountant or counsel before relying on a cost position, signing a certificate, or submitting a claim.
Change log (1)
- LaunchedPublished the federal cost principles, indirect rates & government accounting requirements reference covering how the government decides what an SDVOSB may charge it — the five allowability tests of FAR 31.201-2, reasonableness and allocability (FAR 31.201-3 / 31.201-4), the expressly unallowable costs of FAR 31.205 with directly associated costs (FAR 31.201-6) and the FAR 42.709 / 52.242-3 penalty, the direct-vs-indirect consistency rule (FAR 31.202 / 31.203), the fringe/overhead/G&A pool-and-base structure behind a wrap rate, provisional billing rates (FAR 42.704), the incurred cost submission and final indirect rate settlement (FAR 52.216-7(d) / 42.705 / 42.708 quick closeout), the adequate accounting system tested on the SF 1408 (FAR 16.301-3 / 9.106), timekeeping and labor charging with floor checks and total time accounting, DCAA audits versus DCMA administrative contracting officer determinations, certified cost or pricing data and defective pricing (FAR 15.403-1 / 15.403-4 / 15.406-2 / 52.215-10), and the Cost Accounting Standards with the small-business exemption at 48 CFR 9903.201-1 — each with an at-a-glance quick-facts card, a when-it-applies list, a key-features table, an SDVOSB-specific angle, a how-to-comply checklist, watch-outs, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source FAR / U.S.C. / CFR citations, and cross-links into the glossary, contract types, payment methods, thresholds, clauses, forms (SF 1408), regulation explainers, contracting roles, how-to guides, FAQ, and the price-to-win, size-standard, win-probability, and limitations-on-subcontracting calculators.