One of the distinctive features of federal contracts is the audit clause that gives the contracting officer and the Comptroller General the right to review certain contractor books and records, including:

  1. Examination of costs. If this is a cost-reimbursement, incentive, time-and-material, labor-hour, or price redeterminable contract, or any combination of these, the contractor shall maintain and the contracting officer shall have the right to examine and audit all records and other evidence sufficient to reflect properly all costs claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of this contract. This right of examination shall include inspection at all reasonable times of the contractor's plants, or parts of them, engaged in performance of the contract.
  2. Cost or pricing data. If the contractor has been required to submit cost or pricing data in connection with any pricing action relating to this contract, the contracting officer, in order to evaluate the accuracy, completeness, and currency of the cost or pricing data, shall have the right to examine and audit all of the contractor's records, including computations and projections, related to (1) the proposal for the contract, subcontract, or modification; (2) the discussions conducted on the proposal(s), including those related to negotiating; (3) pricing of the contract, subcontract, or modification; or (4) performance of the contract, subcontract or modification.
  3. Comptroller General. The Comptroller General of the United States shall have access to and the right to examine any of the contractor's directly pertinent records involving transactions related to this contract or a subcontract hereunder.

The federal government contract audit agencies, the largest of which is the Defense Contract Audit Agency (DCAA), are responsible for providing financial and accounting advice to federal government procurement officials. The contracting officer may request field pricing support, which includes a government evaluation of an offeror's proposal prior to negotiation of a contract or modification. The contract auditor also serves as the contracting officer's representative in the review of contractor accounting records and provides advisory comments and recommendations to the contracting officer. While the contract audit opinions are advisory, internal government follow-up procedures have been established to assure appropriate consideration and action taken on audit recommendations.

To provide the contracting officer with financial and accounting advice, the contract auditor performs various reviews, such as the following:

  • Preaward survey. Financial capability and accounting system surveys are performed to assess the prospective contractor's financial soundness, as well as the adequacy of the accounting system to accumulate the type of cost information required by the contract.
  • Forward pricing proposals evaluation. The contract auditor evaluates cost estimates in the contractor's contract-pricing proposal for allocability, reasonableness, and allowability.
  • Postaward review of cost or pricing data. Legislation states that the contractor shall provide the government with accurate, current, and complete cost or pricing data when negotiating contracts. To the extent that the contractor does not comply with the provisions, thereby increasing the contract price, the government is entitled to a corresponding price reduction for the so-called “defective pricing.”
  • Incurred cost audit. This government audit focuses on the allowability of direct and indirect costs billed to the government on contracts providing for cost reimbursement or settlement of final prices based on costs incurred.
  • Cost accounting standards compliance and adequacy reviews. The purpose of the compliance review is to determine whether the contractor's accounting practices conform to the standards promulgated by the CASB. The adequacy reviews are designed to determine whether the description of the cost-accounting practices contained in the company's CAS Disclosure Statement is accurate, current, and complete.
  • System reviews. These audits cover systems related to federal contract pricing, costing, and billing, such as estimating systems, labor reporting systems and billing systems.
  • Terminated contract audits. When a contract or subcontract is partially or completely terminated, the termination contracting officer shall submit all contractor settlement proposals over $100,000 to the appropriate audit agency for examination and recommendations concerning the allocability, allowability, and reasonableness of costs.
  • Claim audits. These audits include evaluations of requests for equitable adjustment and claims.
  • Operations audits and other functional reviews. Generally, these audit activities involve evaluating those management and operational decisions made by the contractor that affect the nature and level of costs being proposed and incurred on government contracts. These reviews usually result in the government auditor providing the company with recommendations on how to improve controls, and the economy and efficiency of contractor operations.

In summary, the fundamental purpose of a government contract audit is to determine the allowability (including reasonableness and allocability) of costs contained either in a proposed price or in a statement of costs incurred during contract performance. Contracts provide broad access rights, and statutory inspectors general and DCAA have authority to subpoena certain contractor books, records, and other supporting documentation.

                                                                                                                            June 2012