What steps should a small business take to prepare for a DCAA audit of its accounting system?

To prepare for a DCAA audit, a small business should ensure its accounting system can track costs by contract line item and segregate direct from indirect costs, which is critical for cost-reimbursement contracts. DCAA looks for systems that comply with FAR Part 31, which covers contract cost principles and procedures. Your system needs to be able to accumulate costs by contract, job, or task, and distinguish between unallowable and allowable costs. For cost-reimbursement contracts, you must have a system that reliably accumulates and reports costs for invoicing and audit. This means being able to track labor, materials, and other direct costs to specific contracts, and then allocating indirect costs like overhead and general and administrative expenses consistently. Many small businesses find their initial accounting systems are not robust enough for the detailed tracking and reporting required for these contract types.