Defending Your Government Contracting Firm Against DCAA Audits in Virginia

Northern Virginia is the epicenter of the government contracting and defense industry in the United States. If your firm is based in Arlington, Alexandria, or Fairfax, facing a Defense Contract Audit Agency (DCAA) audit is often a matter of when, not if. DCAA auditors are highly trained to scrutinize every dollar your firm bills to the federal government. A failed audit can lead to massive financial clawbacks, suspension of future contracts, or even referrals for federal fraud investigations. Navigating this highly complex regulatory framework requires precision and deep knowledge of federal acquisition rules.

We highly recommend utilizing our USA Lawyers catalog to hire a Virginia-based government contracts attorney who specializes in DCAA audit defense. Attempting to negotiate with federal auditors without legal and accounting representation is highly risky and can severely damage your firm's revenue stream.

Step-by-Step Process in Virginia

While the DCAA operates at a federal level, most Virginia defense contractors interact heavily with the Defense Contract Audit Agency, Fort Belvoir and other regional branches. The audit process generally follows a structured, rigorous timeline.

Step 1: Navigating Incurred Cost Submissions

The foundation of most DCAA audits is the incurred cost submission. Under the Federal Acquisition Regulation, 48 C.F.R. § 42.705, contractors must submit an accurate accounting of their indirect costs to establish final indirect cost rates. You have six months following the end of your fiscal year to submit this data. DCAA will review these submissions to ensure you are not overcharging the government. Your accounting system must be capable of segregating direct costs, indirect costs, and unallowable costs seamlessly.

Step 2: Validating Compliant Timekeeping Systems

One of the most frequent reasons defense contractors fail audits is inadequate timekeeping. Auditors will verify if you have an accounting system that meets federal standards, often utilizing Form SF 1408, Federal, General Services Administration, Preaward Survey of Prospective Contractor Accounting System. Your IT and defense staff must record their time daily, charging hours accurately to specific contract tasks. Supervisors cannot fill out timesheets on behalf of employees, and a clear audit trail must exist for any timesheet corrections.

Step 3: Identifying Unallowable Costs

Under Federal Acquisition Regulation, 48 C.F.R. § 31.201, certain expenses simply cannot be billed to the government. These are known as unallowable costs. Common examples include alcohol, first-class airfare, entertainment expenses, and lobbying costs. DCAA auditors will aggressively comb through your general ledger looking for these items. As seen in cases like Kellogg Brown & Root Services, Inc. v. United States, 728 F.3d 1348 (Fed. Cir. 2013), failing to properly strip unallowable costs from your submissions can result in the government outright rejecting your cost claims and assessing penalties.

Step 4: Responding to the Draft Audit Report

Once the auditors conclude their fieldwork, they will issue a draft audit report and invite you to an exit conference. This is a critical juncture. You have the right to respond in writing to any negative findings before the report is finalized. A skilled government contracts lawyer can help you draft a compelling rebuttal, pointing out misinterpretations of the FAR or providing additional documentation that the auditors may have overlooked.

Step 5: Appealing Negative Findings

If the final audit report recommends disallowed costs and the Contracting Officer issues a final decision against your firm, you have the right to appeal. In Virginia, contractors typically appeal to the Armed Services Board of Contract Appeals, Falls Church (ASBCA) or the U.S. Court of Federal Claims. Filing an appeal requires submitting a written Notice of Appeal pursuant to ASBCA Rule 1 and 41 U.S.C. § 7104(a) within a strict 90-day window from the Contracting Officer's final decision.

How Much Does it Cost in Virginia?

Defending against a DCAA audit is an investment in your company's survival, and costs are typically structured around professional fees:

How Long Does the Process Take?

The DCAA audit process is famously slow. From the initial notification to the final audit report, a routine incurred cost audit can take anywhere from 6 to 18 months. If the findings are negative and you decide to appeal the Contracting Officer's final decision to the ASBCA, the litigation process can add an additional 1 to 3 years before a final resolution is reached.

Frequently Asked Questions (FAQ)