Preparing for a DCAA Pre – Award Audit

A DCAA pre-award audit, officially known as a Pre-Award Survey of Prospective Contractor Accounting System (SF 1408), is an assessment conducted by the Defense Contract Audit Agency before the government awards a cost-reimbursable contract.

The primary purpose of this audit is to determine if a contractor’s accounting system is adequate and capable of handling the unique requirements of government contracts, particularly those where the government reimburses the contractor for their actual, allowable costs. It’s a critical step to ensure that taxpayer dollars are spent responsibly and that the contractor can accurately track and report costs.

Here’s a breakdown of what a DCAA pre-award audit entails:

1. Focus on System Design, Not Just Historical Costs:

Unlike some post-award audits that review actual incurred costs, a pre-award audit primarily evaluates the design of the accounting system. It assesses whether the contractor’s system, including its policies, procedures, and internal controls, is structured to effectively manage government contract costs.

2. Triggered by Cost-Reimbursable Contracts:

Pre-award audits are most commonly required for contractors bidding on “cost-type” contracts, such as:

• Cost-Plus-Fixed-Fee (CPFF) contracts: The government pays for all allowable costs plus a fixed fee.

• Cost-Plus-Award-Fee (CPAF) contracts: Like CPFF, but with an incentive fee based on performance.

• Time & Material (T&M) contracts: When they involve cost-reimbursable elements.

3. Key Areas of Assessment (Based on SF 1408 Checklist):

DCAA uses the Standard Form 1408 (SF 1408) as a checklist to guide their assessment. Key areas include:

• Segregation of Direct and Indirect Costs: The system must clearly separate costs directly tied to a specific contract (direct costs) from general operating expenses (indirect costs).
• Job Cost Accounting System: Ability to track and accumulate costs for each individual contract, project, or task.
• General Ledger Control: A well-structured general ledger that provides a complete and accessible audit trail for all financial transactions, ensuring compliance with GAAP and FAR Part 31 (Cost Principles).
• Timekeeping System Compliance: Accurate, timely, and properly approved timekeeping records for all employees, ensuring correct labor cost allocation.
• Labor Distribution System: A clear method for distributing labor costs to direct and indirect cost pools.
• Interim Billing Capabilities: Ability to generate accurate and compliant invoices and financial reports for progress payments.
• Exclusion of Unallowable Costs: The system must be designed to identify and exclude costs that are not allowable under FAR Part 31 or contract terms.
• Identification of Costs by Contract Line Item (CLIN): If required by the contract, the ability to track costs at a granular level.

4. Importance for Contractors:

• Contract Award Prerequisite: Passing a pre-award audit is often a mandatory step to be awarded a cost-type government contract. Failure to demonstrate an adequate system can lead to being denied the award or requiring significant corrective actions before reconsideration.
• Foundation for Future Compliance: Successfully navigating this audit sets the foundation for ongoing DCAA compliance and helps contractors avoid issues in subsequent post-award audits.
• Demonstrates Responsibility: It demonstrates to the government that the contractor has the necessary financial controls and systems in place to be a responsible steward of taxpayer funds.

In essence, a DCAA pre-award audit is a “system design review” to ensure a contractor is structurally prepared to handle the complexities of government cost-reimbursement contracts before they even start incurring costs on that contract.

Preparing for a DCAA Audit

Successfully navigating a Defense Contract Audit Agency (DCAA) audit is crucial for government contractors. It requires meticulous preparation, a clear understanding of the audit process, and effective communication strategies. By adhering to best practices, contractors can minimize disruption, demonstrate compliance, and ensure a smooth audit experience.

Preparation is the cornerstone of a successful DCAA audit. Proactive measures can significantly reduce stress and improve outcomes.

1. Understand the Audit Scope:

• Know the type of audit: DCAA conducts various audits (e.g., pre-award, incurred cost, business systems, labor, material). Understanding the specific audit type helps focus on your preparation.
• Review contract clauses: Familiarize yourself with all relevant Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) clauses in your contracts, especially those related to cost allowability, accounting systems, and reporting.
• Access DCAA resources: The DCAA Contract Audit Manual (CAM) and their website offer valuable insights into audit programs and guidance.

2. Ensure Accounting System Adequacy:

• SF 1408 Checklist: This form is used to assess if your accounting system is adequate for cost-reimbursement type contracts. Ensure your system addresses all 14 criteria, including:

• • Segregation of direct from indirect costs.
  • Accumulation of direct costs by contract.
  • General ledger control and monthly posting of costs.
  • Adequate labor distribution system.
  • Exclusion of unallowable costs.
  • Compliance with Generally Accepted Accounting Principles (GAAP).

• Internal Controls: Document and enforce robust internal controls over financial transactions, timekeeping, expense reporting, and procurement.
• DCAA Compliant Software: Consider using accounting and timekeeping software designed to meet DCAA requirements, which can automate compliance and generate necessary reports.

3. Documentation Checklist:

• Financial Statements: Trial balances, profit & loss statements, balance sheets.
• General Ledger Detail: Comprehensive transaction details for all accounts.
• Incurred Cost Submissions: If applicable, ensure your Incurred Cost Electronic (ICE) model is accurate and supported.
• Timekeeping Records: Approved timesheets, labor distribution reports, payroll records. Ensure accuracy, completeness, and proper supervisory approvals.
• Expense Reports: Detailed and adequately supported expense reports.
• Vendor Invoices and Purchase Orders: Supporting documentation for all material and subcontract costs.
• Travel Vouchers: Properly authorized and documented travel expenses.
• Policies and Procedures: Current and readily available accounting policies, timekeeping procedures, and other relevant internal guidelines.
• Contract Files: All contract documents, modifications, and correspondence including company-prepared contract brief.
• Prior Audit Reports and Corrective Actions: Demonstrate that previous audit findings have been addressed.

Bay Business Group can be an invaluable asset for government contractors preparing for and successfully navigate a DCAA audit. We have a deep understanding of FAR and DFARS as well as the DCAA Audit Manual (CAM). BBG professionals are experts in implementing DCAA compliant accounting systems including setting up the proper chart of accounts, establishing compliant timekeeping systems, segregating direct, indirect and unallowable costs, creating cost pools and bases for accurate indirect rate calculations, and implementing robust internal controls.