May 25, 2026
What Happens When a DCAA Audit Finds Deficiencies? A Realistic Guide
Types of DCAA findings, the financial impact (questioned costs, withholdings, lost contracts), and the recovery path. Prevention vs. remediation, with realistic numbers.
Audit findings happen. Even well-intentioned contractors with reasonable systems occasionally receive findings — sometimes because of a genuine gap, sometimes because of a documentation issue that's easy to correct. Understanding the consequences helps you assess the risk rationally and prioritize your compliance investments.
Types of Findings
Not all findings are equal.
Questioned costs are the most common. The auditor identifies costs charged to government contracts that don't comply with FAR cost principles or contract terms. The contracting officer decides whether to sustain the auditor's recommendation — if they do, you owe the money back.
Significant deficiencies indicate that one or more aspects of your accounting system don't meet the SF-1408 criteria. These are correctable — you fix the gap, get re-evaluated, and move forward. But while the deficiency exists, it affects payment terms.
Material weaknesses are the most serious — fundamental flaws that could result in significant misstatement of contract costs. These can trigger payment withholdings and require substantial corrective action.
Financial Impact
Questioned costs are straightforward: the contracting officer may require repayment. If your timekeeping records can't adequately support $50,000 in labor charges, that $50,000 might be disallowed. On cost-reimbursement contracts, this comes directly off your revenue.
Payment withholdings are triggered by system deficiencies. Under DFARS 252.242-7006, the government can withhold 5–10% of interim payments for significant deficiencies. On a $2 million annual contract, that's $100,000–200,000 held back until the deficiency is corrected.
Even without formal findings, contractors without an approved accounting system may face a default 2% withholding on interim payments. On that same $2M contract, $40,000 is held back simply because the system hasn't been formally evaluated as adequate.
Impact on Future Contracts
A negative pre-award survey means the current contract isn't awarded until deficiencies are corrected. But the impact extends further — DCAA reports are available to other contracting officers. A finding on one contract can affect your competitiveness on future awards.
For small contractors dependent on new awards, a systemic accounting deficiency can effectively freeze growth for months while you remediate.
The Recovery Path
For questioned costs: review the auditor's report, provide supporting documentation if available, negotiate with the contracting officer, and implement process changes to prevent recurrence.
For system deficiencies: identify the specific criteria not met, implement corrections, document the changes, and request a follow-up evaluation. Simple fixes (implementing supervisor approval, updating a timekeeping policy) can be resolved in weeks. Larger changes (implementing a new system, restructuring the chart of accounts) may take months.
Putting It in Perspective
A finding isn't a death sentence for your business. Most findings are correctable, and the government generally works with contractors who demonstrate good faith effort to fix problems.
The real cost isn't usually the finding itself — it's the time and money spent correcting it under pressure. Restructuring an accounting system, retraining employees, and engaging consultants to help remediate is significantly more expensive than setting things up correctly from the start.
The math consistently shows that prevention costs 1–2% of remediation. A DCAA-compliant timekeeping and labor distribution setup costs a few thousand dollars per year. Remediating a deficiency finding — between questioned costs, withheld payments, professional fees, and lost opportunities — can easily exceed $50,000–100,000.
What we've seen in practice "Becoming DCAA compliant quickly is hard. You need processes in place — chart of accounts, job costing, labor distribution — running before the audit, not in response to it. That's the difference between confidence and scrambling."
— Brian Wendroff, CPA — CFO & Co-founder, WiseCost · Founder, Wendroff & Associates, CPA
The Constructive Takeaway
If you're reading this before you have a finding, use this as motivation to close any gaps now. Review your timekeeping system, your chart of accounts, your documentation, and your processes. A self-audit that identifies and fixes issues before DCAA does is the best investment you can make.
If you're reading this after a finding, know that it's fixable. Work with your CPA or a GovCon compliance consultant, address the specific deficiencies cited, and request the follow-up evaluation. Contractors come back from findings regularly.
Want to find your gaps before DCAA does? Take our free DCAA Readiness Self-Assessment — a 5-minute self-audit using the same SF-1408 criteria auditors apply.
Reviewed by Brian Wendroff, CPA — CFO & Co-founder, WiseCost · Founder, Wendroff & Associates, CPA.