The letter arrives on a Tuesday. DCAA letterhead, your company name, a contract number, and a list of records the auditor expects within three business days. Your accounting manager is on vacation. Your timesheets live in three different spreadsheets. The last time anyone reconciled your labor distribution report was seven months ago.
DCAA audit preparation follows a structured approach: self-assessment of your accounting system against DFARS 252.242-7006 criteria, remediation of identified gaps, and readiness testing using DCAA’s own SF 1408 checklist. DCAA identified $15.9 billion in audit exceptions in FY2024. Contractors who self-audit and correct deficiencies before fieldwork begins experience shorter audits, fewer findings, and reduced risk of payment withholding under DFARS 252.242-7005.
Most contractors treat DCAA audit preparation as a weekend project. Pull some files, organize some folders, hope for the best.
The results match the effort. DCAA identified $15.9 billion in audit exceptions in FY2024 (DCAA Annual Report to Congress). Contractors who self-audit before DCAA arrives tell a different story: they voluntarily removed $4.2 billion in questionable costs (DCAA Annual Report to Congress) before auditors ever saw the books.
DCAA audit preparation follows a 90-day phased approach: 30 days of self-assessment, 30 days of remediation, and 30 days of readiness testing. Amerifusion Bookkeeping uses this framework with every GovCon client because it addresses the root cause of audit failures: contractors who discover problems at the same time the auditor does.
The First Test in DCAA Audit Preparation
DCAA auditors follow a predictable opening sequence when they arrive at your office or request initial records. The first comparison is almost always timesheets against the labor distribution report (LDR). If recorded hours on individual timesheets do not match the summary hours on your LDR, the auditor flags your entire labor charging system for expanded review [FAR 52.216-7].
This matters because labor is the largest cost category for most GovCon contractors. A timesheet showing 6 hours on Contract A while the LDR shows 8 hours tells the auditor your internal controls have a gap. One discrepancy triggers sampling. Sampling triggers a full labor audit covering months or years of charges.
The fix takes 20 minutes per month: reconcile every employee’s timesheet total against the LDR before closing the accounting period. Run this reconciliation monthly, and the auditor’s first test becomes your strongest evidence of compliance. Skip it, and a $200 discrepancy in March becomes a $200,000 questioned cost finding by December.
Days 1 to 30: Self-Assessment Phase
DCAA audit preparation starts with finding problems before the auditor does. Pull three months of records and test them against the same standards DCAA applies. This phase produces the highest return on preparation time because voluntary corrections cost nothing, while DCAA findings trigger penalty exposure under FAR 52.242-3 (fines up to treble damages plus $14,308 to $28,619 per false claim under the False Claims Act).
Start with these six steps:
- Reconcile timesheets to labor distribution reports. Pull every employee’s timesheets for the past quarter. Match total hours per contract against the LDR. Flag discrepancies over 0.25 hours.
- Test expense reports against FAR 31.205. Pull 90 days of expense reports. Check each line item against the allowability rules. Entertainment, alcohol, lobbying, and first-class airfare are always unallowable.
- Verify unallowable cost segregation. Confirm every unallowable cost sits in a segregated account per CAS 405. If unallowable costs are mixed into indirect pools, the entire pool is at risk.
- Test indirect rate calculations. Recompute your fringe, overhead, and G&A rates from the general ledger. Compare against the rates on your most recent incurred cost submission.
- Review written accounting policies. Read every policy document. If the policy says you allocate overhead on direct labor dollars but your system allocates on direct labor hours, you have a CAS 401 consistency violation.
- Document compensation reasonableness. Pull salary data for your five highest-paid employees. Compare against the FAR 31.205-6(p) annual compensation cap ($646,000 for 2024, $671,000 for 2025, $695,000 for 2026) and benchmark against market surveys for your geography and industry.
Days 31 to 60: Remediation Phase
The second phase fixes what the self-assessment found. Every discrepancy from Days 1 to 30 needs a documented correction, a root cause explanation, and a process change to prevent recurrence. DCAA auditors view corrective actions favorably when they are documented, dated, and systematic.
Corrections made during an active audit look like reactions, not controls. Complete your remediation before the auditor arrives.
- Reclassify misallocated costs. Move unallowable costs out of indirect pools with journal entries. Date them, explain them, and keep the backup documentation. Voluntary reclassifications before an audit are evidence of good faith.
- Update written policies to match actual practices. If your business has outgrown a policy, rewrite the policy to reflect current operations. Never change your practice to match an outdated policy during audit season: the auditor will notice the sudden change.
- Build document response packages. Organize records by the categories DCAA requests most often: labor, indirect costs, direct costs, unallowable costs, and timekeeping procedures. Stage them for three-day turnaround.
- Brief employees on timekeeping procedures. Every direct-charge employee should know three things: which contract they are charging to, what task they are performing, and how to correct a timesheet error. Do this training NOW, not after a floor check notification arrives.
- Reconcile provisional rates to actual rates. Calculate the gap between what you billed and what you actually incurred. If your provisional overhead rate is 120% but your actual is 105%, the government will recover the 15-point difference during audit.
Days 61 to 90: Readiness Phase
The final phase of DCAA audit preparation shifts from fixing problems to testing your ability to survive the audit process itself. DCAA does not grade on preparation alone. The audit tests your ability to produce records quickly, answer questions accurately, and demonstrate consistent practices between your written policies and daily operations.
- Conduct a mock audit. Assign someone outside the accounting department (or your external CPA) to play the auditor role. Give them a list of 10 records to request and a 3-day deadline. If your team misses the deadline, fix the retrieval process before the real audit.
- Designate a single point of contact. One person handles all auditor communication. This prevents conflicting answers, controls document flow, and protects employees from informal questioning that produces unintended admissions.
- Review prior audit findings. Pull every previous DCAA audit report. Verify each finding has a documented corrective action. Repeat findings on the same issue signal systemic failure and escalate the audit scope.
- Stage documents for three-day turnaround. Auditors expect records within three business days of request. Slow responses trigger “access to records” findings under DFARS 252.242-7006. Organize your files so any requested document is retrievable in under four hours.
- Run final rate calculations. Recompute every indirect rate one last time. Verify the math ties to the general ledger, the schedules tie to each other, and the totals tie to your accounting system. Mathematical errors in rate computations are the most preventable and most embarrassing audit findings.
Preparation Differences by Audit Type
Not all DCAA audits examine the same records or follow the same timeline. A contractor preparing for a pre-award survey focuses on system design, while a contractor facing an incurred cost audit focuses on transaction-level evidence.
Effective DCAA audit preparation requires matching your effort to the specific audit type. Preparing for the wrong one wastes time and leaves actual vulnerabilities exposed.
| Audit Type | Primary Focus | Preparation Priority | Typical Notice |
|---|---|---|---|
| Pre-Award Survey (SF 1408) | Accounting system adequacy: 18 criteria under DFARS 252.242-7006 | Written policies, chart of accounts, timekeeping system design | 2 to 4 weeks (typical) |
| Incurred Cost Audit | Actual costs vs. claimed rates across all 15 ICS schedules | Rate reconciliation, unallowable cost segregation, Schedule N certification | 1 to 3 years after ICS filing (typical) |
| Floor Check | Real-time timekeeping accuracy and employee awareness | Standing readiness: employee training, posted procedures, supervisor protocols | None (unannounced) |
| Forward Pricing | Proposed rates vs. historical actuals | Rate history documentation, proposal support schedules | 30 to 120 days (typical) |
| Business System | System design vs. actual practice alignment | Policy-to-practice testing, internal control documentation | 3 to 12 months (typical) |
Floor checks deserve special attention because they allow zero preparation time. The 90-day playbook builds standing readiness for floor checks through the employee briefings in Days 31 to 60. One critical rule: never coach employees on what to say when an auditor arrives. If DCAA suspects coached responses, the coaching itself becomes a finding. Train employees on procedures, not on answers.
The Voluntary Deletion Strategy
DCAA reported $4.2 billion in voluntary contractor deletions across 1,229 submissions in FY2024. These are costs contractors identified and removed from their claims before DCAA examined them. The number reveals something competitors never discuss: the most effective DCAA audit preparation strategy is removing the costs you know will be questioned.
Voluntary deletions work because they eliminate the finding before it exists. A $50,000 entertainment expense left in your indirect pool becomes a questioned cost, a penalty risk, and a credibility problem with the auditor. Remove it during your Days 1 to 30 self-assessment, and it becomes evidence of a functioning internal control system.
Run this test quarterly, not annually. Pull your general ledger, filter for the FAR 31.205 unallowable categories (entertainment, alcohol, donations, lobbying, first-class travel, interest, bad debts), and verify every dollar is in a segregated account. The contractors who produced those billions in FY2024 voluntary deletions did not wait for an audit notification. They built this review into their monthly close process.
Frequently Asked Questions
How long should DCAA audit preparation take?
A structured preparation timeline runs 90 days: 30 days for self-assessment, 30 for remediation, and 30 for readiness testing. Contractors who maintain monthly reconciliation practices reduce active preparation time significantly because their records stay audit-ready year-round.
What records does DCAA request first during an audit?
Auditors typically start with timesheets and the labor distribution report. They compare individual recorded hours against summary totals to test labor charging accuracy. If these records do not reconcile, the auditor expands the scope to cover additional months and all direct-charge employees.
How quickly must contractors produce documents during a DCAA audit?
DCAA expects document delivery within three business days of each request. Repeated delays trigger “access to records” findings under DFARS 252.242-7006. Contractors who stage records by audit category during preparation consistently meet this turnaround standard without disrupting daily operations.
What are voluntary deletions and why do they matter?
Voluntary deletions are costs contractors remove from their claims before DCAA examines them. In FY2024, contractors voluntarily deleted $4.2 billion across 1,229 submissions. Self-identifying and removing questionable costs demonstrates functioning internal controls and reduces the scope of the audit examination.
Should employees be coached before a DCAA floor check?
Train employees on timekeeping procedures, not on specific answers. If a DCAA auditor suspects coached responses during a floor check, the coaching itself becomes an audit finding. Employees should know which contract they charge to, what task they perform, and how to correct timesheet errors.
Key Takeaways
- Start with the first test. Reconcile timesheets against labor distribution reports monthly. This is the comparison DCAA auditors run before examining anything else, and a mismatch escalates the entire audit scope.
- Build voluntary deletions into your monthly close. FY2024 voluntary deletions prove self-auditing works at scale. Review FAR 31.205 unallowable categories quarterly and reclassify costs before an auditor finds them.
- Stage records for three-day turnaround. Organize documents by audit category so any requested record is retrievable in under four hours. Slow responses create findings independent of the underlying accounting quality.
- Floor check readiness requires standing procedures, not last-minute preparation. Train employees on timekeeping rules continuously. Never coach them on what to say to an auditor.
- Take the Compliance Readiness Check to identify preparation gaps before starting your 90-day timeline.
DCAA audit preparation is not a project with a deadline. The discipline belongs inside your monthly accounting cycle. The contractors who perform best under DCAA examination are the ones who stopped treating audits as surprises years ago.
If your firm needs help building a 90-day preparation timeline or improving audit readiness, explore Amerifusion’s DCAA compliance services or start with our DCAA compliance guide.
