DCAA Accounting Compliance — CAS, Audits & Rate Structures
The Defense Contract Audit Agency (DCAA) is responsible for auditing the accounting systems and cost representations of government contractors. If you hold or pursue cost-reimbursement, T&M, or flexibly-priced contracts, DCAA compliance is not optional — it is a prerequisite.
This guide covers Cost Accounting Standards, what makes an accounting system "adequate," how to structure your cost rates, incurred cost submissions, and how to prepare for and survive a DCAA audit.
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Cost Accounting Standards (CAS) Overview
Cost Accounting Standards are a set of 19 standards (CAS 401-420) issued by the CAS Board that govern how contractors measure, assign, and allocate costs to government contracts. CAS ensures consistency and transparency in cost accounting practices so the government can fairly evaluate and compare contractor costs.
CAS applies in two tiers. Modified CAS coverage (FAR 52.230-3) applies to contractors receiving $7.5 million to $50 million in CAS-covered contracts. It requires compliance with CAS 401 (consistency in estimating, accumulating, and reporting costs) and CAS 402 (consistency in allocating costs to the same objective).
Full CAS coverage (FAR 52.230-2) applies to contractors receiving $50 million or more in CAS-covered contracts. It requires compliance with all 19 CAS standards and imposes a Disclosure Statement (DS-1/DS-2) requirement. The Disclosure Statement describes your cost accounting practices in detail and must be submitted to the cognizant federal agency official (CFAO) for adequacy review.
CAS Exemptions
- • Contracts below the CAS threshold ($7.5M cumulative net CAS-covered awards)
- • Firm-fixed-price contracts awarded on the basis of adequate price competition
- • Contracts with small businesses
- • Contracts for commercial items under FAR Part 12
- • Sealed bid contracts (FAR Part 14)
Adequate Accounting System Requirements
Before awarding a cost-reimbursement, T&M, or labor-hour contract, the contracting officer must determine that the contractor's accounting system is adequate for the contract type. DFARS 252.242-7006 defines the criteria DCAA uses to evaluate accounting system adequacy. An inadequate system finding can disqualify you from award.
Segregation of costs
The system must segregate direct costs from indirect costs and accumulate costs by contract. Each contract must have its own cost center or job code so costs are not commingled.
Accumulation of costs by contract
All costs charged to a contract must be identifiable and traceable to the specific contract. The system must produce reports showing costs by CLIN, task order, and cost element.
Timekeeping system
Employees must record time daily using a timekeeping system that captures hours by contract/project. Time records must be approved by supervisors and must reflect actual hours worked, not estimates.
Labor distribution
The system must distribute labor costs to the appropriate direct or indirect cost pool based on actual time records. Floor checks (unannounced verification of employee activities vs. time charges) must be passable.
Indirect cost pools
Indirect costs must be accumulated in properly defined pools (fringe, overhead, G&A) and allocated to contracts using a consistent and equitable allocation base.
Billing system
The system must support preparation of accurate interim and final invoices that reconcile with the accounting records. Billed amounts must be traceable to cost records.
Direct vs. Indirect Costs and Rate Structures
The fundamental distinction in government contract accounting is between direct and indirect costs. Direct costs are costs that can be specifically identified with a particular contract (direct labor, direct materials, travel for a specific contract). Indirect costs are costs that benefit multiple contracts and cannot be practically charged to a single contract (rent, utilities, management salaries, corporate insurance).
Typical Rate Structure
Your indirect rates are initially established as provisional billing rates, which are your best estimates of what the actual rates will be. You bill the government at these provisional rates during the year. After year-end, you submit an Incurred Cost Submission (ICS) that calculates your actual rates. DCAA audits the ICS and the contracting officer establishes final rates. Any difference between provisional and final billings is settled (you either owe the government money or the government owes you).
Incurred Cost Submissions (ICS)
FAR 52.216-7 requires contractors with cost-reimbursement contracts to submit an Incurred Cost Submission within 6 months after the end of each fiscal year. The ICS is a comprehensive package of schedules that reconciles your claimed costs to your financial records and calculates your actual indirect cost rates.
DCAA provides a model ICS format (ICE Model) with approximately 20 schedules. Key schedules include: Schedule A (total costs by cost element), Schedule B (direct costs by contract), Schedule H (claimed indirect rates), Schedule I (summary of adjustments), and Schedule O (certificate of final indirect costs signed by a corporate official).
Failure to submit an adequate ICS on time can result in withholding of up to 5% of interim payments on all cost-reimbursement contracts. DCAA's backlog of ICS audits has historically been significant, but recent initiatives have reduced audit cycle times. Even if your ICS is not immediately audited, it must be complete and accurate because DCAA can audit any prior year within the statute of limitations (6 years).
Common DCAA Audit Findings
Employees not recording time daily, using estimates instead of actuals, missing supervisor approvals, or floor check failures. This is the single most common finding.
FAR Part 31 defines over 50 cost categories. Costs like entertainment, alcoholic beverages, fines/penalties, lobbying, and certain executive compensation are expressly unallowable. Charging these to contracts, even indirectly, triggers questioned costs.
Treating the same type of cost as direct on some contracts and indirect on others without a documented rationale. CAS 402 requires consistency in allocating costs to the same cost objective.
Executive compensation exceeding the statutory cap (currently ~$625K for 2026 contracts) or employee compensation that is unreasonable compared to market benchmarks. DCAA uses BLS data and compensation surveys for comparisons.
Commingling costs between contracts, failing to maintain separate cost centers for each contract, or booking costs to a general pool rather than the specific contract they benefit.
Failure to maintain supporting documentation for costs charged. Travel vouchers without receipts, purchase orders without invoices, or subcontract costs without evidence of the subcontractor's performance.
How to Prepare for a DCAA Audit
Conduct a self-assessment
Before DCAA arrives, audit yourself using the DCAA pre-award survey checklist (SF 1408). Identify and correct deficiencies proactively. It is far better to find and fix problems yourself than to have DCAA discover them.
Organize your documentation
Ensure every cost charged to a contract has supporting documentation: timesheets, receipts, invoices, purchase orders, and subcontract agreements. Organize by fiscal year and contract. DCAA will request specific documents and expects a quick turnaround.
Review unallowable costs
Run a complete analysis of FAR Part 31 unallowable costs against your general ledger. Ensure all unallowable costs are properly identified and excluded from your indirect rate calculations. Set up separate accounts for unallowable costs.
Verify rate calculations
Reconcile your indirect rate calculations to your financial statements and general ledger. Ensure your allocation bases are consistent with your Disclosure Statement (if applicable) and that pool compositions have not changed without proper disclosure.
Train your staff
Ensure employees understand timekeeping requirements, expense reporting procedures, and what not to say during an audit. Designate a single point of contact for all DCAA inquiries. Provide only what is requested and do not volunteer additional information.
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