The Defense Contract Audit Agency audited more than 5,600 contractor locations in FY2023 and questioned over $800 million in costs. Most of those dollars were at small businesses that thought their accounting was fine. It wasn't.
DCAA doesn't care whether you use QuickBooks or Deltek. It cares whether your system can separate direct costs from indirect costs, whether your timekeeping is contemporaneous, and whether your indirect rates are calculated consistently. Those three things determine whether you can survive an audit and keep cost-reimbursable work.
What DCAA actually audits
DCAA has several audit types. Two matter most for small businesses.
Pre-award surveys happen before you win your first cost-type contract. The contracting officer requests a pre-award survey when your proposal exceeds roughly $750,000 on a cost-reimbursable basis (the threshold sits at FAR 15.408, Table 15-2). DCAA checks whether your accounting system is adequate before the government gives you access to cost-reimbursable funds.
Floor checks happen unannounced, usually within the first year of a new contract. An auditor shows up, asks to see timesheets for a specific date, and then walks the floor confirming that the employees recorded on those timesheets are physically present and working on what they claimed. This takes about two hours. The auditor is not trying to trip you up — they're verifying your timekeeping is real and contemporaneous, meaning employees recorded time on the day they worked, not reconstructed at the end of the week.
Beyond floor checks, DCAA audits incurred costs annually on cost-reimbursable contracts. You submit your Incurred Cost Submission (ICS) by June 30 for the prior fiscal year. DCAA reviews your actual indirect rates against the provisional rates billed throughout the year, and you either get a check back or write one. Backlogs run two to four years at many DCAA offices, so you may not hear back quickly — but the liability accumulates.
The three accounting requirements that trip small businesses
Separate direct and indirect costs. Every cost your business incurs must be classified as either direct (billable to a specific contract) or indirect (overhead, G&A, fringe). You need a chart of accounts that makes this separation explicit. Indirect costs are grouped into pools — typically fringe benefits, overhead, and G&A — each allocated to contracts using a base that makes economic sense. Fringe is usually allocated on direct labor dollars. G&A is usually allocated on total cost input. DCAA does not prescribe the pools or bases, but it will question them if they're inconsistent year over year or if the allocation method produces unreasonable results.
Contemporaneous timekeeping. Employees must record time on the day worked. Not the next morning. Not Friday afternoon for the whole week. Each entry must show the contract number charged, the hours worked, and any corrections must be initialed by the employee with the original entry still visible. Digital systems are fine, but they need audit trails. DCAA has disallowed millions of dollars in labor costs over timekeeping that looked reconstructed — entries with uniform eight-hour days, no corrections, entered on Monday for the prior week.
Consistent application of accounting practices. If you treat a cost as direct on Contract A, you can't treat the same type of cost as indirect on Contract B. DCAA calls this consistency between contracts and between periods. A written accounting policies and procedures manual documents your choices and commits you to them. Without one, DCAA assumes your practices are arbitrary.
QuickBooks: what it can and can't do
QuickBooks can support DCAA compliance for small contractors on fixed-price contracts. For cost-reimbursable work, it requires significant setup and discipline to work.
The core problem is that QuickBooks was designed for commercial accounting. It doesn't natively enforce time-charging at the contract line item level, and its job costing module isn't purpose-built for government indirect rate structures. You can build a chart of accounts that separates direct and indirect costs. You can configure class tracking to segregate costs by contract. Many small contractors do this successfully.
What QuickBooks cannot do out of the box: it doesn't have a built-in time-and-attendance module with proper audit trails. The built-in time tracking records hours but doesn't prevent backdating or show correction history the way DCAA expects. You'll need a separate timesheet system — T&E systems like ClockShark, Replicon, or even a well-administered Harvest account with locked periods can fill this gap.
DCAA doesn't maintain a list of "approved" accounting systems. It publishes an Internal Control Questionnaire (ICQ) with 18 criteria that an adequate accounting system must meet. You can download it from the DCAA website (postaward.dcaa.mil). Work through it against your current setup before DCAA does.
If you're pursuing a contract worth more than $2 million in cost-reimbursable work, or if your business grows past 20 employees on government contracts, the operational complexity of managing QuickBooks for DCAA compliance usually exceeds the license cost savings. Deltek Costpoint, Unanet, and Jamis Prime are the three systems most commonly used by small contractors specifically because they're built around the FAR cost principles in Part 31 and Part 42. Expect $10,000 to $30,000 in implementation costs for a small business, plus $500 to $1,500 per user per year depending on the system and configuration.
Indirect rates: the numbers that matter most
Your indirect rates are expressed as percentages applied to a base. A simple structure for a small contractor:
- Fringe rate: fringe costs divided by direct labor dollars. If you pay $100,000 in salaries charged directly to contracts and $30,000 in benefits, your fringe rate is 30%.
- Overhead rate: indirect costs of performing work (equipment, rent allocated to project work) divided by direct labor plus fringe.
- G&A rate: general and administrative costs divided by total cost input or cost of sales.
You bill these rates provisionally throughout the year using estimates, then true up at year-end with your actual ICS. DCAA reviews the ICS and issues a Final Indirect Cost Rate agreement or opens a formal audit. Any indirect costs that violate FAR Part 31 — entertainment, alcohol, unallowable legal fees, executive compensation above the published cap (set annually by the Office of Federal Procurement Policy; $606,005 for FY2024) — are disallowed and must be removed before billing.
When to hire a government accounting consultant
Three situations warrant bringing in outside help before DCAA arrives.
Your first cost-reimbursable award. Set up correctly from day one. Reconstructing a year of transactions to meet DCAA standards is far more expensive than configuring the system properly before you start billing. A government accounting consultant typically charges $150 to $300 per hour; a proper setup engagement for a small contractor runs $5,000 to $15,000.
A failed pre-award survey. If DCAA issues an "inadequate" determination, you have a defined window to remediate before the contract is withheld. Consultants who specialize in DCAA remediation know exactly which deficiencies the auditor flagged and what documentation will close them.
Your incurred cost submission is overdue. The ICS deadline is June 30. If you've missed it by more than six months, DCAA can withold payment on your current contracts. A consultant can help you prepare a late submission and negotiate the schedule.
Organizations like APEX Accelerators (formerly PTACs) offer free government accounting consultations for small businesses. Call your local APEX office first. They won't implement a system for you, but they'll review your chart of accounts and timekeeping procedures at no cost and tell you where the gaps are.
Three action steps
- Download DCAA's accounting system ICQ from postaward.dcaa.mil and run through all 18 criteria against your current setup. Mark any "no" answers — those are your gaps.
- If you use QuickBooks, confirm your timesheet system creates immutable audit trails with timestamps and correction history. If it doesn't, switch before your next cost-reimbursable proposal goes in.
- Contact your local APEX Accelerator for a free pre-award accounting review. Find your closest office at apexaccelerators.us. Go before you need it.
