Overview
FAR Subpart 42.1 prescribes the policies and procedures for obtaining contract audit services and identifies the responsibilities of the cognizant audit agencies. It establishes the Defense Contract Audit Agency (DCAA) as the primary authority for auditing commercial contractors to ensure that proposed and incurred costs are reasonable, allocable, and allowable.
Key Rules
- Cost Acceptability: The primary role of the auditor is to provide advice on the acceptability of a contractor’s incurred and estimated costs based on financial and accounting records.
- DCAA Cognizance: DCAA is the default audit agency for most commercial contractors. For educational institutions and nonprofit organizations, audit cognizance is determined by OMB Uniform Guidance (2 CFR part 200).
- Audit Requests: Contracting Officers (COs) must request audit services directly from the cognizant office listed in the Directory of Federal Contract Audit Offices and must include a specific suspense date.
- Right of Refusal: An audit agency may decline a request for services in writing if they lack the necessary resources to complete the task.
- System Reviews: Auditors are tasked with reviewing the financial aspects of a contractor's cost control systems, not just individual line-item costs.
Responsibilities
- The Auditor:
- Analyzes contractor financial records and accounting data.
- Submits advisory reports to the requesting activity regarding cost acceptability.
- Reviews contractor cost control systems.
- The Contracting Officer (CO):
- Identifies the cognizant audit office via the DCAA-maintained directory.
- Formally requests audits and provides necessary documentation and deadlines.
- Defense Contract Audit Agency (DCAA):
- Maintains and distributes the Directory of Federal Contract Audit Offices.
- Acts as the cognizant auditor for most commercial federal contracts.
- Agencies:
- Must coordinate and agree on the most efficient approach if an agency other than DCAA seeks cognizance over a specific contractor.
Practical Implications
- Audit Readiness: Contractors must maintain robust accounting systems that track costs at a granular level, as FAR 42.101 grants auditors broad access to financial records to validate cost control systems.
- Timeline Management: Because audit agencies can decline requests due to resource constraints (FAR 42.102(b)), Contracting Officers must plan for potential delays in the procurement cycle, especially during "busy seasons" for DCAA.
- Interagency Coordination: For contractors working with multiple agencies (e.g., DOD and NASA), this subpart prevents redundant audits by establishing a "cognizant" audit office that serves as the single point of contact for financial oversight.
- Nonprofit/University Nuances: Contractors in the educational or nonprofit sectors must look to OMB Uniform Guidance rather than standard DCAA procedures, which often involve different compliance thresholds and indirect cost rate structures.