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A contract with the Department of Defense is subject to oversight by the Defense Contract Audit Agency (DCAA).

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The Department of Defense (DOD*) is an executive branch of the federal government charged with coordinating and supervising all functions of the government concerned with national security and the U.S Armed Forces. There are three subordinate military departments and four national intelligence services: the U.S. Department of the Army, the Department of the Navy, and the Department of the Air Force, as well as the Defense Intelligence Agency (DIA), the National Security Agency (NSA), the National Geo-spatial Intelligence Agency (NGA*), and the National Reconnaissance Office (NRO). Other Defense Agencies include the Defense Advanced Research Projects Agency (DARPA*), the Defense Logistics Agency (DLA), the Missile Defense Agency (MDA), the Defense Threat Reduction Agency (DTRA) and the Pentagon Force Protection Agency (PFPA).


If you are receiving funds from the Department of Defense, you must have a Federal Acquisition Regulations (FAR*) and Defense Contract Audit Agency (DCAA*) compliant accounting system.
The type and amount of award funding determines the DCAA audit you are subject to.


Typically, a DOD SBIR* Phase I award comes in the form of a fixed-price contract, which are not subject to audit.
DOD Phase II funding are typically cost-reimbursable type contracts. Cost-reimbursable contracts are in most cases, R&D projects where the DOD will reimburse you for your allowable costs. All “cost reimbursable” type funding vehicles require the recipient to properly account for all actual project specific costs as well as the proportional indirect costs associated with the award.


With cost-reimbursable awards you are responsible for accounting for the costs you will be reimbursed for, and therefore subject to several types of DCAA audits, including:

  • Pre-Award Audits
  • Indirect Cost* Rate Projection audits
  • Progress Billing audits (including examining your WAWF* billing)
  • Annual Incurred Cost* Submission audits
  • Surprise Floor Check* audits
  • Accounting System audits
  • Contract close out*

To make sure you’re adhering to government award requirements, you’ll be audited. Most of the audits listed above are performed by the DCAA on a judgmental basis, or as requested by your technical customer or contracting office. The annual incurred cost submission has a 100% chance of being audited, although DCAA may rotate between desk audits and live, in-person audits, based on your overall risk assessment.

The annual incurred cost submission and everything that goes with FAR 52.216-7.

The annual incurred cost submission or “true up” report* is due 180 days after the Company’s fiscal year end and must reflect all general ledger expenses on a generally accepted accounting principles (GAAP*) basis. This report is used by the local DCAA branch office to help the customer settle the final accounting for all contracts, including the negotiation of a final indirect cost rate agreement.

DCAA Compliance Accounting Requirements

  • All expenses must be accounted for and reported as either direct, indirect and unallowable based on the Federal Acquisition Regulations (FAR). Additionally, the DOD Supplemental Regulations must be applied – which may affect the recovery of salaries, patent & legal costs, and travel costs among others.
  • All labor costs must be distributed through the general ledger, on an accrual basis, based on monthly labor distributions derived from employee prepared (and supervisor approved) time sheets, which must be reconciled to the quarterly payroll tax returns – a cash basis document. Indirect costs must be proportionally allocated to all contract and non-contract (including commercial) activities based on the methodology agreed to in the annual indirect cost rate negotiation. Care must be taken to ensure that the recovery of indirect costs is properly established to avoid embedding negative cash flow surprises into your business relationship with the government.
  • Detailed descriptions of all subcontracting costs.
  • The annual incurred cost submission must be certified by an officer of the Company.

Once the annual incurred cost report is submitted, any over-billing or under-billing of indirect expenses must be proactively remedied on a contract-by-contract basis.


We are the leading experts in the accounting and administration of government contracts, and we enjoy an excellent professional reputation with many of the DCAA branch offices and contracting officers.

Through our JamesonWorx solutions, we can:



    in the development of the financial portion of your contract proposal including the appropriate indirect cost rate


    Set Up

    your accounting system and train your financial liaison



    the initial and ongoing indirect cost rate agreements and represent you during all DCAA audit(s)



    your accounting system on a periodic basis including ensuring that Wide Area Work Flow (WAWF) billings are accurate



    the annual incurred cost audit



    with overall strategic planning and transaction planning


JamesonWorx combines our expertise in DOD funding awards with an innovative platform. Explore our four service levels and find the one that fits your company’s needs best.

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