The Taxpayer Times

Types of DCAA Audits and How They Relate to One Another

When people search for information about DCAA audits, they often encounter fragmented explanations. One article discusses pre-award audits. Another focuses on incurred cost submissions. A third mentions accounting systems or billing reviews. Read separately, each explanation feels incomplete. Read together, they can feel overwhelming.

This confusion usually comes from a single assumption. The assumption is that a DCAA audit is one event. In reality, the term DCAA audit refers to a group of reviews, each designed to examine a specific aspect of government contracting at a specific point in time.

Understanding this structure matters. It replaces anxiety with context. It also explains why different audits exist, why they occur when they do, and why the same contractor may be reviewed multiple times for different reasons.

Why DCAA Audits Are Structured in Layers

DCAA oversight is not built around a single question. It is built around a sequence of questions that arise as a government contract moves forward.

Before a contract is awarded, the question is whether a contractor is capable of tracking costs properly. During performance, the question becomes whether costs are being recorded and billed correctly. After work is completed, the question shifts again to whether the costs claimed were allowable, supported, and calculated accurately.

Each audit exists to answer one of these questions. No single audit is designed to answer them all.

This layered approach explains why audits can feel disconnected when viewed individually, but logical when viewed as a whole.

Pre-Award Audits and the Question of Readiness

A pre-award audit occurs before certain types of government contracts are awarded. Its purpose is narrow and forward-looking.

At this stage, the government is not examining past billing or completed work. It is evaluating whether the contractor’s accounting structure is capable of handling government requirements if a contract is awarded.

The focus is on system design rather than results. Auditors examine how costs would be accumulated, how labor would be tracked, how indirect costs would be grouped, and whether unallowable costs can be identified and excluded.

This audit exists because once a contract is awarded, the government relies on the contractor’s systems. The pre-award audit is a checkpoint meant to reduce uncertainty before that reliance begins.

Accounting System Audits and Internal Structure

An accounting system audit examines whether the contractor’s accounting system meets the standards required for government contracting.

This type of audit is not primarily concerned with how much was spent. It is concerned with how costs flow through the system. The review focuses on whether direct and indirect costs are clearly distinguished, whether indirect cost pools are logical and consistent, whether labor distribution is tied to reliable timekeeping, and whether costs are treated consistently from period to period.

Many issues identified in accounting system audits arise because systems were never designed with government oversight in mind. A system that works adequately for tax reporting or internal management may still fall short of government expectations.

This audit exists to identify gaps before they affect billing or cost recovery.

Incurred Cost Audits and Looking Backward

An incurred cost audit reviews costs that have already been incurred and reported for a complete period, usually a fiscal year.

Unlike earlier audits, this one is retrospective. The system has already been used. Costs have already been recorded. Rates have already been applied. The audit examines whether the results of that process align with applicable rules.

Auditors review whether the costs claimed are allowable, whether they are supported by documentation, and whether indirect rates are calculated using appropriate bases and methods.

One of the defining characteristics of incurred cost audits is timing. These reviews often occur long after the period under review has ended. This is why documentation, consistency, and record retention matter so much. The audit does not rely on explanation. It relies on records.

Billing and Voucher Reviews During Performance

While work is ongoing, DCAA may review billings submitted to the government. These reviews focus on whether amounts billed align with contract terms, approved rates, and recorded costs.

Billing audits are usually limited in scope. They do not examine the entire accounting system or all cost categories. Instead, they focus on whether specific charges were calculated correctly and supported by underlying records.

These audits exist because billing errors affect government payments directly. Even small inconsistencies can disrupt cash flow or lead to additional review.

Targeted Audits and Focused Reviews

Not all audits fall into standard categories. In some cases, DCAA conducts targeted reviews focused on a specific area of concern.

These audits may examine labor charging practices, timekeeping controls, or a particular cost element that requires clarification. They are typically narrow in scope and tied to a defined objective rather than a broad evaluation of the contractor.

Targeted audits often follow earlier reviews. They exist to resolve open questions, verify corrections, or examine areas where risk remains.

Multiple Audits Are Not Unusual

A common misunderstanding is that repeated audits indicate a problem. In government contracting, multiple audits are often part of normal oversight.

Different audits occur at different stages and address different issues. A contractor may encounter a pre-award audit early on, followed by an accounting system audit, annual incurred cost audits, and occasional billing reviews.

This progression reflects the structure of oversight rather than suspicion. Each audit stands on its own and serves a specific purpose.

What Connects All DCAA Audits

Although DCAA audits differ in timing and focus, they share common themes.

Consistency matters. Costs must be treated the same way over time. Documentation matters. Records must support what is claimed. Systems matter. Accounting practices must reflect how the business actually operates.

Most audit findings do not arise suddenly. They develop gradually, often from informal practices that were never examined closely until an audit required them to be.

Looking Ahead

Part 5 will examine common audit findings and explain why audits result in problems even when no intentional error exists. The focus will shift from audit types to patterns that appear across reviews.

Understanding those patterns clarifies how decisions made long before an audit can shape what happens during it.

Author’s Note

This article is written for informational and educational purposes. It explains how DCAA audits are structured and why different types of audits exist. It is not intended as legal, accounting, or contracting advice, and it does not address the circumstances of any specific contractor.