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Career News | Feb. 8, 2021

Common DCAA Audits: Incurred Cost

By DCAA Staff Writer

Let’s break down one of the most common types of audits completed: An incurred cost audit.

Purpose:

This type of audit helps assess the accuracy of a contractor’s annual costs. It determines whether the costs are allowable, reasonable, and allocable to the contract in accordance with contract terms, cost accounting standards, and government laws or regulations. This helps contracting officers recover overpaid costs before a contract is officially closed out.

Contractors and Timeline:

Incurred cost audits can be performed for any DoD contractor; they are not specific to only one type of contractor or office. This is because all government contractors must submit their incurred costs. For smaller contractors, a random sample is audited to ensure compliance. All larger contracts, however, must go through this type of audit.

DCAA auditors have 12 months from the date of the submission to complete the audit, but a majority are completed in less time. Audits for small contractors may be performed by a single auditor, while audits for larger contractors require a team of auditors.

Typical Activities Can Include:

  • Reconciliations – Reconciling amounts billed to contractors’ books and records, or payroll dollars to payroll tax filings.Magnifying glass over numbers
  • Auditing Labor Costs:
    • Evaluating adjusting journal entries and exception reports.
    • Determining if both executive and employee compensation is reasonable by reviewing market studies and other sources.
    • Conducting labor floor checks and interviews to evaluate timekeeping procedures and the accuracy of contractor labor hour charges.
  • Determining that costs are allowable under Federal Acquisition Regulations (FAR).
  • Determining that materials purchased were required for the contract, purchased at a reasonable quantity and price, were used on the contract, and were in compliance with contract terms.

Once complete, DCAA submits the results of the audit to the appropriate contract authority. The findings are then used to negotiate and settle final indirect rates and direct costs.

Interested in learning more about DCAA audits? Read our Understanding DCAA Audits and Forward Pricing Audit blogs.