🇺🇸United States

Withheld and Disallowed Costs from Inadequate DCAA Audit Support

4 verified sources

Definition

When contractors cannot adequately support billed costs during DCAA audits, contracting officers withhold or permanently disallow revenue (e.g., on interim vouchers, incurred cost proposals, or progress billings). This results in immediate cash shortfalls and, if not resolved, permanent revenue loss on cost-reimbursable and flexibly priced contracts.

Key Findings

  • Financial Impact: Common DCAA practice is to recommend withholds of 5–15% of billings or disallow questioned costs; in a 2023 DCAA report to Congress, auditors questioned $3.7 billion in costs across all audits, a significant share attributable to inadequate supporting documentation and non‑compliant systems, implying recurring multi‑million‑dollar leakage for larger defense/aerospace manufacturers each year.
  • Frequency: Monthly
  • Root Cause: Non‑compliant accounting systems, weak timekeeping and labor charging controls, and poor audit‑trail documentation during DCAA preparation mean that when an audit or voucher review occurs, contractors cannot substantiate all billed costs, so DCAA questions or disallows them and contracting officers reduce or suspend payments.

Why This Matters

This pain point represents a significant opportunity for B2B solutions targeting Defense and Space Manufacturing.

Affected Stakeholders

CFO, Controller, Government Compliance Manager, Program Finance/Project Accountant, Contracts Manager, Billing/AR Specialists

Deep Analysis (Premium)

Financial Impact

$1.2M - $5M annually per prime contractor in questioned subcontractor costs, delayed payments to subs, and potential cost disallowance on FFP/CR portions of contract • $1.5M–$6M per contract (NASA contracts often range $20–100M); multi-year projects accumulate configuration drift that auditors flag as unsubstantiated cost growth • $1.8M - $6.2M annually in cost disallowances and interim payment withholding (6-11% of monthly billings on $20M-$80M annual DHS contract portfolio); extended audit cycles add 60+ days to payment settlement

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Current Workarounds

Ad-hoc cost recovery journals, manual timesheet reconciliation in Excel before audit submission, shadow cost books maintained by Program Controller, undocumented cost transfers between cost centers • Adapted Excel templates (often from prime contractor audit kits); manual cost allocation to FMS programs; email-based approval chains; reliance on prime contractor guidance rather than independent compliance • Compartmentalized cost tracking in classified networks (SIPRNET), manual cost adjustments outside primary accounting system, printed cost reports stored in secure facilities, verbal cost justifications to auditors

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Methodology & Sources

Data collected via OSINT from regulatory filings, industry audits, and verified case studies.

Evidence Sources:

Related Business Risks

Excessive Internal Labor and Consultant Spend on DCAA Audit Fire‑Drills

Industry practitioners report that medium to large defense manufacturers routinely incur hundreds to thousands of internal hours per major DCAA audit, plus six‑figure consulting engagements; for a portfolio with multiple concurrent audits, this can easily exceed $500,000–$2,000,000 per year in avoidable recurring preparation and remediation costs.

Rework and Re‑submission of Incurred Cost and Supporting Schedules After DCAA Findings

DCAA’s annual reports show high volumes of questioned and unsupported costs; contractors then expend significant additional internal labor to correct and justify those costs, often representing tens of thousands of staff hours across major defense manufacturers annually, translating into recurring multi‑hundred‑thousand‑dollar rework burdens per large enterprise.

Payment Delays from DCAA‑Driven Voucher Holds and Questioned Costs

Contractors can face 60–90+ day delays on significant invoices when DCAA or the contracting officer suspends or withholds payment; for large programs with monthly billings in the tens of millions, this represents recurring working‑capital exposure easily in the $10M–$100M range and associated interest costs annually.

Finance and Program Management Capacity Consumed by DCAA Audit Cycles

For large defense/aerospace manufacturers with dozens of active contracts, recurring audit‑related capacity loss can total thousands of high‑value hours per year; at blended fully burdened rates of $100–$200/hour, this equates to hundreds of thousands to low millions of dollars in lost productive capacity annually.

Penalties, Interest, and Adverse Rate Adjustments from DCAA Non‑Compliance

DCAA’s annual reports detail billions of dollars in questioned and disallowed costs government‑wide each year; where issues are sustained, contractors not only forgo recovery but may also owe refunds and interest. High‑profile DoD IG and DOJ cases tied to defective pricing and non‑compliant accounting have resulted in multi‑million to multi‑hundred‑million‑dollar settlements in the aerospace and defense sector.

Labor Mischarging and Cost Misallocation Uncovered by DCAA Floor Checks

DoD IG and DOJ enforcement actions in the aerospace/defense sector regularly involve multi‑million‑dollar settlements for labor mischarging and misallocation; beyond legal settlements, affected contractors lose recovery of the mischarged costs, incur investigation and remediation expenses, and may suffer suspension or debarment risk on future awards.

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