The Good
Ok, finding some good is going to be a challenge. Let's start with the fact that the Defense Contract Audit Agency (DCAA) receives approximately 3,500 incurred cost proposals annually, but only audits around 500 of them. And even though DCAA is still auditing about 75% of the dollars submitted ($193B), only .3% is questioned ($760M), and only 31% of that is likely to be sustained by contracting officers. This comes from the DCAA Report to Congress for 2024.
See, we did find some good.
The Bad
The Department of Defense (DoD) Professional Practice Guide – Audits and Oversight of Defense Contractor Costs and Internal Controls (First Edition January 2019) was developed based on input and support from the Section 809 Panel put in place by the fiscal year 2016 National Defense Authorization Act (NDAA) and a requirement to adopt commercially accepted standards of risk and material from Section 803 of the fiscal year 2018 NDAA. This guide was intended to help focus incurred cost audits on what is likely to have a material impact on the cost allocated to Government contracts. The guide does a good job of laying out the concept of materiality, the impact of government participation on the base of the indirect cost rates, and the considerations to be assessed when determining the type of audit opinion to be expressed (i.e., unqualified, qualified, etc.).
The breakdown comes on page 20, where the guide states that Government Auditing Standards (FY 2018 Yellow Book, paragraphs 7.46 and 9.38) require that even immaterial findings must be communicated (i.e., reported). The FY 2024 Yellow Book has the same requirement.
There is a requirement to communicate the immaterial findings. The problem is the statement in the guide that reads, "the need for communicating immaterial information is important because it can result in the transfer of funds between the contractor and government." This implies that even though the amounts are immaterial, some action should be taken by the contracting officer. This is not the case, or at least should not be the case. The cost to both parties (the Government and the contractor) is likely to be much greater than the benefit to either.
Thus, we have the bad, spending $2 to save a $1. Likely not the best approach "to ensure DoD gets the best value for every dollar spent on defense contracting."
And Now for The Ugly
DCAA auditors continue to question incurred cost based on FAR 31.201-2(d). FAR 31.201-2(d) states, "A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported." (Emphasis Added) The key word is "may." This implies to me that the contracting officer should consider all the facts related to cost, not just that a supporting document could not be found. If the other transactions audited disclosed unallowable costs, perhaps the entire account should be questioned or disallowed.
My concern is the other side of the coin. The auditor reviewed the supporting documentation for 38 of the 40 transactions audited, finding no unallowable costs. However, the two remaining transactions with missing documentation are being questioned. The basis for questioning the cost is simply a reference to FAR 31.201-2(d) with no detail as to the risk or any basis, whatsoever, to support the need for the contracting officer to exercise his/her discretion to disallow the cost.
In the first few years of DCAA's use of Independent Public Accountants (IPAs) to perform incurred cost audits, we observed little of this questionable practice from IPAs. Well, DCAA has been able to influence the IPAs to start down this same road of questioning any unsupported transactions.
It is interesting to see in DCAA's recent update (June 2025) to its Post Year End Incurred Cost Audit programs (10100 Small and 10100 Large), there is a Note that states: "Costs should not be questioned if reasonableness cannot be established. If significant, a reservation on the engagement should be reported as well as the non-compliance with FAR 31.201-2(d)." Only time will tell if this has any impact on this questionable practice.
So much for the Ugly.
Strengthening Compliance Beyond the Audit
Navigating incurred cost audits and addressing questioned costs can be challenging and time-consuming. Our team understands the complexities contractors face, from preparing compliant submissions to responding to audit findings and maintaining thorough documentation. We support government contractors with services that include audit readiness assessments, indirect rate support, policy and procedure development, and ongoing compliance consulting. By partnering with experts who know the nuances of government contracting, you can focus on delivering value while we help you mitigate risks and manage audit demands.
John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant