FAR Audit 101

A FAR audit refers to a financial audit performed in accordance with the Federal Acquisition Regulation (FAR). The FAR is the primary set of rules governing the acquisition process by which federal agencies purchase goods and services. When companies contract with the federal government, especially under cost-reimbursement contracts, they may be required to undergo a FAR audit to ensure compliance with federal regulations and proper use of government funds.

Purpose of a FAR Audit

The main goal of a FAR audit is to determine whether a contractor’s financial systems, cost records, and internal controls are:

• Accurate and reliable for reporting contract costs.
• Compliant with FAR cost principles, such as those found in FAR Part 31 (Contract Cost Principles and Procedures).
• Adequately documented to support billings, incurred costs, and indirect cost allocations.

A FAR audit provides federal agencies with confidence that contractors are billing only for allowable and allocable costs and that taxpayer money is spent appropriately.

Types of FAR Audits

Several types of FAR-related audits may be performed by the Defense Contract Audit Agency (DCAA) or other cognizant audit agencies:

• Pre-award Audits – Reviewing a contractor’s accounting system before a cost-type contract is awarded.
• Incurred Cost Submissions (ICS) Audits – Verifying that costs claimed under government contracts are allowable, reasonable, and properly allocated.
• Business System Audits – Evaluating systems such as purchasing, estimating, and accounting to ensure they meet FAR standards.

Who Requires a FAR Audit?

A FAR audit is generally required for:

• Federal Government Contractors – Especially those working under cost-reimbursable contracts, time-and-material contracts, or other agreements where payment is based on actual costs incurred.
• Large Federal Contractors – Organizations with significant government contract activity often undergo regular DCAA oversight.
• Small Businesses with Cost-Type Contracts – Even new or smaller contractors may be subject to FAR audits if their agreements involve reimbursement of costs.
• Grant and Cooperative Agreement Recipients (in some cases) – While grants often fall under the Uniform Guidance audit requirements (2 CFR Part 200), certain agreements may still require FAR compliance depending on the funding agency and contract terms.

Why It Matters

Failing to comply with FAR requirements can result in:

• Disallowed costs and repayment to the government.
• Delayed payments on contracts.
• Increased oversight or restrictions on future contracts.
• In extreme cases, suspension or debarment from federal contracting.

Conclusion

A FAR audit is a critical compliance requirement for organizations that contract with the federal government under cost-based contracts. It ensures that contractors maintain adequate financial systems, properly track costs, and follow federal regulations. Whether an organization is a large defense contractor or a small business entering the federal marketplace, understanding FAR audit requirements is essential to maintaining eligibility for government contracts and building a reputation as a trusted partner.

For more information about McKonly & Asbury’s Architecture, Engineering, and Construction (AEC) experience, visit the AEC Industry Page and don’t hesitate to contact a member of the AEC team.

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