For many government contractors, preparing for a DCAA audit becomes a priority only when an audit notice is received.

However, even experienced contractors — including those who have been through audits before — often make critical mistakes that can lead to:

• Audit findings
• Disallowed costs
• Delays in contract approvals
• Increased scrutiny from agencies

At Peter Witts CPA PC, we’ve worked with government contractors for over 37 years, and one thing remains consistent:
Experience alone does not guarantee compliance

 

 

Why DCAA Audits Still Catch Experienced Contractors Off Guard

 

Many seasoned contractors assume that:

• Their systems are already compliant
• Past audit success ensures future success
• Minor inconsistencies won’t matter

In reality:

• Regulations evolve
• Business operations change
• Systems drift from their original design

Over time, small gaps can turn into significant audit risks.

 

 

Common Mistakes Experienced Contractors Still Make

 

1. Inconsistent Timekeeping Practices

 

Even when a compliant system is in place, issues arise when:

• Employees fail to record time daily
• Corrections are not properly documented
• Supervisory approvals are inconsistent

DCAA auditors often focus heavily on timekeeping because:
Labor is typically the largest cost on government contracts

Small inconsistencies can raise questions about the integrity of the entire system.

 

 

2. Misclassification of Costs

 

As businesses grow, cost structures become more complex.

Common issues include:

• Mixing direct and indirect costs
• Incorrectly assigning costs to contracts
• Including unallowable costs in indirect pools

Misclassification is one of the most common causes of audit findings.

 

 

3. Outdated or Incomplete Policies and Procedures

 

Many contractors establish policies early on — but fail to update them.

Problems arise when:

• Policies no longer reflect actual practices
• Staff are unaware of documented procedures
• Internal controls are not consistently followed

DCAA evaluates not just what you do — but whether your policies align with your practices

 

 

4. Weak Documentation and Audit Trail

 

Even legitimate costs can be disallowed if:

• Supporting documentation is missing
• Allocation methodologies are unclear
• Records are inconsistent

Documentation should clearly support:

• The nature of the cost
• Its allowability under FAR
• Its allocation to specific contracts

 

5. Overreliance on Accounting Software

 

Many contractors assume their accounting system ensures compliance.

However:

• Software alone does not guarantee DCAA compliance
• Improper setup or usage can create gaps
• Processes and controls matter just as much as tools

Compliance is driven by how the system is used, not just the system itself.

 

 

6. Lack of Ongoing System Review

 

Systems that were once compliant may become non-compliant over time due to:

• Business growth
• New contracts
• Changes in staffing
• Evolving regulations

Without periodic reviews, these changes can introduce:

• Inconsistencies
• Process breakdowns
• Increased audit risk

 

 

What DCAA Auditors Actually Look For

 

DCAA auditors typically evaluate whether your system is:

• Consistent → Are policies applied uniformly?
• Accurate → Are costs recorded correctly?
• Supported → Is there sufficient documentation?
• Compliant → Does everything align with FAR and DCAA guidelines?

The focus is not just on numbers — but on the integrity of your system as a whole

 

 

How to Strengthen Your Audit Readiness

 

1. Conduct Regular Internal Reviews

 

Don’t wait for an audit notice.

Regular reviews can help:

• Identify gaps early
• Correct inconsistencies
• Ensure policies are being followed

 

2. Reinforce Timekeeping Discipline

Ensure:

• Daily time entry
• Clear correction procedures
• Proper approvals

Consistency is critical.

 

 

3. Align Policies with Actual Practices

 

Your written policies should:

• Reflect how your business operates today
• Be communicated clearly to staff
• Be consistently followed

 

4. Strengthen Documentation Practices

 

Maintain:

• Complete supporting records
• Clear allocation methodologies
• Organized audit trails

If an auditor asks, you should be able to provide documentation quickly and confidently.

 

 

5. Periodically Review Your Accounting System

 

As your business evolves, your system should too.

Review:

• Chart of accounts
• Cost allocation methods
• Indirect rate structure
• Reporting capabilities

 

 

The Reality: Experience Doesn’t Replace Discipline

One of the most important lessons we’ve seen over the years is this:

 

Even experienced contractors can fail audits if discipline slips

Compliance is not:

• A one-time setup
• A past achievement

It is an ongoing process that requires:

• Consistency
• Attention to detail
• Regular oversight

 

Final Thoughts: Stay Audit-Ready at All Times

 

DCAA audits should never come as a surprise.

With the right systems, processes, and discipline in place, contractors can:

• Reduce audit risk
• Avoid costly findings
• Maintain confidence in their operations

At Peter Witts CPA PC, we help government contractors stay audit-ready — not just when an audit is scheduled, but every day.

 

 

 

Need Help Preparing for a DCAA Audit?

 

If you’re unsure whether your current system would stand up to a DCAA audit, we’re here to help.

 

Schedule a consultation with Peter Witts CPA PC to review your processes, identify potential risks, and ensure your system is fully compliant.