In 2019, a defense contractor based in Virginia faced a substantial penalty of $12.3 million. This was a consequence of DCAA auditors uncovering systematic labor mischarging across several cost-plus contracts. The contractor’s inadequate timekeeping system and failure to maintain proper supporting documentation, as required under FAR 31.201-3, led to questioned costs. This ultimately resulted in an 18-month suspension from federal contracting. This case serves as a clear example of the repercussions when contractors underestimate the scope of DCAA and fail to maintain compliant accounting systems.
Legal Foundation: The Regulatory Framework DCAA Enforces
DCAA operates under explicit statutory authority derived from three primary sources. First, 10 U.S.C. § 2313 grants DCAA broad audit authority over defense contractors, including access to records, facilities, and personnel. Second, FAR Part 31 establishes cost principles that govern allowability, allocability, and reasonableness of costs charged to government contracts. Third, the Cost Accounting Standards (CAS) under 48 CFR 9900 series mandate specific accounting practices for covered contracts exceeding $2 million.
The confluence of these authorities means DCAA auditors possess unprecedented access to contractor records. Under FAR 52.215-2, contractors must maintain and provide access to records supporting certified cost or pricing data for three years after final payment. Failure to comply triggers penalties under the False Claims Act, with treble damages plus civil penalties ranging from $13,508 to $27,018 per violation under 31 U.S.C. § 3729.
Common Violation Patterns: Where Contractors Fail
DCAA auditors consistently identify five violation patterns across contractor populations. Labor mischarging represents the most frequent violation, occurring when contractors lack adequate internal controls to ensure accurate time recording per CAS 418. A 2021 DCAA report documented $847 million in questioned costs attributed to inadequate labor accounting systems. DCAA compliance requirements include strict adherence to CAS 418 for time recording. Audit requirements often focus on the robustness of internal controls over labor charging.
Indirect cost pool violations constitute the second most common issue. Contractors frequently fail to maintain consistent treatment of costs between periods, violating CAS 402’s consistency requirements. DCAA has assessed penalties exceeding $200 million annually for inconsistent cost accounting practices. DCAA compliance requirements demand consistent cost accounting treatment, as per CAS 402. Audit requirements will scrutinize consistency in indirect cost pool allocations.
Unallowable cost violations rank third, typically involving entertainment expenses, lobbying costs, or executive compensation exceeding regulatory thresholds under FAR 31.205. The Department of Justice has recovered over $1.2 billion in fiscal year 2023 alone from contractors who improperly charged unallowable costs to government contracts. DCAA compliance requirements prohibit charging unallowable costs specified in FAR 31.205. Audit requirements will involve a thorough review of expenses for unallowable costs.
Defective pricing represents the fourth violation category, triggered when contractors fail to disclose current, complete, and accurate cost or pricing data. The Truth in Negotiations Act (TINA) under 10 U.S.C. § 3706 allows government recovery of excess payments plus interest and penalties. DCAA compliance requirements under TINA mandate transparent and accurate cost or pricing data. Audit requirements will verify the completeness and accuracy of submitted cost and pricing data.
Finally, inadequate accounting system maintenance violations occur when contractors fail to establish systems meeting FAR 16.301-3 requirements for cost-reimbursable contracts. DCAA has disapproved accounting systems for over 300 contractors annually, effectively barring them from receiving new cost-type awards.
Step-by-Step Compliance Requirements
Step 1: Implement Compliant Timekeeping Systems Establish labor accounting systems that satisfy CAS 418 requirements for measuring, assigning, and allocating labor costs. Systems must capture actual hours worked by cost objective, maintain contemporaneous records, and provide audit trails linking timesheet entries to specific contract line items. Documentation must support the relationship between labor costs and contract performance per FAR 31.201-4.
Step 2: Segregate Direct and Indirect Costs Maintain accounting systems that consistently classify costs as either direct or indirect per CAS 402. Direct costs must be specifically identified with particular cost objectives, while indirect costs require allocation through approved base periods. Establish written policies defining cost classification criteria and ensure consistent application across all contracts and accounting periods.
Step 3: Establish Indirect Cost Pool Controls Create formal indirect cost structures that comply with CAS 410 allocation requirements. Pools must contain homogeneous costs with similar beneficial or causal relationships to cost objectives. Maintain supporting documentation for allocation base selection and ensure bases accurately measure cost objective activity levels.
Step 4: Implement Unallowable Cost Identification Develop systematic processes to identify, segregate, and exclude unallowable costs from government billings per FAR 31.201-6. Maintain detailed records of unallowable cost determinations and ensure accounting systems prevent inadvertent charging to government contracts. Establish monthly reviews to identify questionable costs before billing submission.
Step 5: Maintain Adequate Documentation Standards Establish record-keeping systems that satisfy FAR 4.703 retention requirements and provide sufficient detail to support cost incurrence and allocation decisions. Documentation must demonstrate the allowability, allocability, and reasonableness of all costs charged to government contracts. Maintain records for the longer of three years after final contract payment or contract completion.
Cost Analysis: Compliance Investment vs. Penalties
Non-compliance costs significantly exceed prevention investments. DCAA-identified questioned costs averaged $2.1 billion annually over the past five years, representing direct contractor liability before considering False Claims Act penalties, legal fees, and business disruption costs.
A typical mid-size contractor implementing comprehensive compliance systems incurs initial costs of $150,000 to $300,000 for system development, training, and process implementation. Annual maintenance costs range from $75,000 to $150,000 for ongoing compliance monitoring and system updates.
Conversely, major compliance violations trigger average penalties of $8.4 million per contractor, based on Department of Justice settlement data from 2018-2023. When combined with legal defense costs averaging $2.1 million per case and business disruption from contract suspension, total non-compliance costs frequently exceed $15 million per violation instance.
The cost-benefit analysis strongly favors proactive compliance investment. Contractors spending $200,000 annually on compliance systems reduce their violation risk by approximately 85%, according to DCAA audit result analysis across similar contractor populations.
Conclusion: Proactive Compliance as Business Strategy
DCAA compliance represents a fundamental business requirement, not an optional enhancement. The regulatory framework underlying DCAA authority provides auditors with extensive access rights and enforcement mechanisms that can devastate non-compliant contractors. The choice between proactive compliance investment and reactive penalty payment is clear: systematic compliance costs significantly less than violation consequences while preserving contractor access to the federal marketplace.
Contractors who view DCAA compliance requirements as compliance burdens rather than business fundamentals consistently face higher audit frequencies, increased questioned costs, and greater enforcement actions. Conversely, contractors implementing robust compliance systems experience reduced audit scope, faster resolution of findings, and maintained eligibility for new contract opportunities.
The federal contracting market’s $600 billion annual volume makes compliance investment a strategic imperative. Contractors unable or unwilling to maintain systems that meet DCAA compliance requirements forfeit access to this market, while compliant contractors position themselves for sustained growth within the federal sector.
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