Government contractors (“GovCons”) operate in a highly regulated environment, where compliance with federal rules and contract terms is critical. One of the most important oversight mechanisms that federal acquisition officers use is the post-award contract audit. These audits help ensure that contractors are meeting all relevant contractual, regulatory, and financial obligations and that taxpayer dollars are being spent appropriately. Understanding the purpose and process of federal contract audits is essential for maintaining compliance and building trust with government agencies.

Here’s what you need to know: 

What is a federal contract audit?

Federal contract audits come in a wide variety of types and typically include a formal review of a government contractor’s financial records, accounting systems, and business practices. The goal of federal contract audits covering flexibly priced contracts – such as cost-plus-fixed-fee and time-and-materials – is to help ensure that costs billed to the government are allowable, properly allocated, and reasonable within the terms of their contract, including applicable regulations like the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS). 

Types of GovCon audits

Government contractors are subject to a variety of audits throughout the contract lifecycle, each designed to address specific compliance and financial requirements. Below are common types of federal GovCon audits:

• Pre-award audits: Assess readiness before contract award (e.g., accounting system surveys and audits, proposal audits)
• Incurred cost audits: Review costs billed on flexibly priced contracts during and after contract performance
• Special audits: Focus on specific areas like labor (e.g., floor checks), indirect rates (e.g., CAS compliance), or business systems (e.g., estimating system)
• Closeout audits: Final review before contract completion

What do federal contract auditors look for?

When preparing for a government contract audit, it’s important to understand the key areas auditors will evaluate to help ensure compliance and accuracy. Auditors focus on several critical aspects of your accounting and contract compliance management processes, including:

• Compliance with FAR & CAS: Are your accounting practices and cost allocations in line with federal regulatory requirements?
• Allowable costs: Are you only billing costs that are permitted under the terms of the contract?
• Internal controls: Do you have robust systems to prevent errors, fraud, and mischarging?
• Supporting documentation: Can you provide clear, organized records for all billed costs to substantiate they are allowable, properly allocated, and reasonable?
• Timekeeping: Is your labor-charging system compliant, and does it properly allocate labor costs to proper cost objectives?
• Indirect rates: Are your indirect rates (including fringe, overhead[s] and G&A) properly calculated and supported and consistently applied?
• Billing & invoicing: Are your invoices accurate and supported by sufficient and proper documentation?
• Subcontractor management: Are you adequately monitoring and documenting subcontractor costs and performance?

A GovCon audit is a rigorous process, but with sufficient preparation and strong internal controls, it can be managed smoothly.

Best practices

To successfully navigate government contract audits, organizations should adopt the following best practices that can help ensure their team is prepared and their processes are audit-ready:

• Stay organized: Keep all records, policies, and supporting documents easily accessible. Set up organization protocols as though the person creating the record, policy, and/or support will not be in the organization next week. 
• Train your team: Make sure everyone understands and adheres to compliance requirements.
• Conduct internal audits/managerial reviews: Regularly review your own systems to catch issues early.
• Foster transparency: Encourage ethical practices and open communication throughout the team.
• Respond promptly: Address auditor requests and findings quickly and thoroughly.

Next steps

Readying for a contract audit should not be a stressful exercise. The right advisor will properly prepare your financial and operational team, help ensure regulatory compliance, and strengthen your organization’s risk and internal control management.

At CohnReznick, we guide government contractors through the complexities of contract audits with clarity and confidence – as we are often on the other side as the auditor. Whether you’re preparing for an audit or seeking ongoing advisory support, our team brings the unique experience of performing contract audits for a wide variety of federal agencies, along with deep industry knowledge and a commitment to your success.