DCAA Pre-award Audit Looming? No Need to Panic!

Some of us have been around long enough to recall the day when a "Pre-award Survey of Prospective Contractor Accounting System" conducted by  DCAA auditors armed with the SF 1408 checklist would strike panic and fear in GovCon accounting staff members. Long hours would be spent in addition to daily workloads to prepare as best that they could with limited resources. It wasn't too terribly long ago that I spoke to a room full of government contractors on the topic of "How to Survive a DCAA Pre-Award Audit." In fact, from the 1960s through the early 2000s, when a contractor was notified of an impending audit, they could at best request a copy of the DCAA Manual No. 7641.90 entitled "Information for Contractors" if they even were aware that it existed in the first place. Things improved by the late 1990s and 2000s with the rise of the World Wide Web and DCAA was able to publish such information on its website. This presumably would keep prospective contractors from being caught flat-footed when the auditors arrived. That said, with abundant information and guidance available to review and download, how many contractors in recent years would still manage to fail the pre-award survey audit? 

I put that question to the DCAA in a series of FOIA requests in order to get statistics on how many pre-award audits are conducted in a given fiscal year, and the corresponding number of failed audits. Here is a sampling of the results:

As you can see, the rate of failure has steadily declined over the past decade and it's less about "survival" these days. The number of audits performed in recent years has declined as well, presumably in part due in part to the global pandemic (yes, DCAA conducts audits beyond the United States). Also, about a decade ago, civilian agencies that did not employ their own internal auditors would contract with DCAA to conduct pre-award audits.  Some of these agencies -notably USAID -now more often utilize independent CPA firms to perform pre-award audits as has been the case traditionally with Single Audits. Whatever the reason for the decreasing number of audits in recent years, your chances of your accounting system being deemed deficient or inadequate are less than 10% as the above chart reveals. And, of those contractors who failed, how many failed due to a lack of documented policies and procedures? How many failed due to inadequate accounting software that fell short of the desired feature set? The particular points of failure remain unknown because DCAA won't get that specific, but you get the idea - not many! 

As contractors have become more savvier and aware of the requirements and are therefore better prepared than they were even as recently as a  dozen years ago, the odds of passing have greatly increased. This is due in part to contractors having invested in cost accounting software like SYMPAQ that provides the functionality that government contractors need and at a low cost of ownership. There really aren't too many excuses for not having an adequate accounting system in place these days when the DCAA schedules an audit. Back in the era when on-premise licenses involved a significant upfront license fee, I would often hear, "Let's wait to see if we get the award first before we make an investment in new accounting software." It was a bad strategy back then, and it makes less sense today with affordable monthly installment payments spread over one year and month-to-month thereafter. And, it remains true that accounting-related costs are allowable and therefore recoverable. 

To conclude, we have come to believe that the fear of loss is a stronger motivator than the potential to gain. With the recent pre-award audit pass rate in excess of 90%, the days of being kept awake at night by a looming DCAA pre-award survey seem to have greatly subsided. That said, why operate at a disadvantage? Don't invest in cost accounting software just in order to potentially win a flexibly-priced contract award, but rather invest in your accounting system to gain the efficiencies of implementing information technology that will make your life easier when it comes to estimating, accumulating, and reporting costs.  

You can also listen to our podcast: "First Encounter With DCAA"