The Defense Contract Audit Agency (DCAA) has increased audits of government contractors' compensation costs. To prepare, contractors should develop a compensation strategy, assess market compensation, design a competitive program, submit it for approval, review administration processes, and prepare documentation. Contractors should establish market-based strategies approved by their boards, regularly benchmark jobs and pay against markets, and modify programs as needed. PwC can assist with all stages of preparation and response to audit findings.

1. PricewaterhouseCoopers
Human Resource Services
Preparing for a DCAA Compensation Audit
Background
The Defense Contract Audit Agency (DCAA) has increased its compensation
audit activity and is aggressively questioning reimbursement of compensation
costs incurred by government contractors. The DCAA has established a
specialized team focused on compensation audits and is investing in survey
resources to support their compensation audits. Accordingly, contractors
must ensure that the reasonableness of their compensation programs is
demonstrable on audit. Otherwise, a significant portion of a contractors’
compensation expense may be questioned and ultimately disallowed.
How should government contractors prepare for a DCAA
Compensation Audit?
To prepare for a DCAA compensation audit, government contractors should
take the following steps:
• Develop and document a compensation strategy;
• Conduct a market compensation assessment;
• Develop a market-competitive compensation program;
• Submit compensation programs to the assigned Administrative Contracting
Officer (ACO), who is responsible for approving compensation programs;
• Review the current compensation administration process and controls for
adherence to compensation strategy and approved programs; and
• Develop appropriate documentation to facilitate audit defense to maximize
reimbursement.
A detailed compensation strategy that appropriately takes into account the
labor market for the applicable positions and that complies with the Federal
Acquisition Regulation (FAR) should be approved by the Board of Directors.
Next, contractors should regularly conduct competitive compensation
assessments to compare their pay practices to the established market to
determine whether or not these pay practices are consistent with the stated
compensation strategy and other applicable guidance, and identify any gaps.
Maintaining comprehensive, up-to-date job descriptions is imperative to
facilitate effective benchmarking, particularly since the DCAA will rely on these
descriptions to conduct their reasonableness assessment. By conducting
regular compensation assessments, a contractor will have data to back up its
pay positions at the time of the audit.

2. With its strategy and the results of its assessment in hand, the contractor should
design or modify its compensation program to be consistent with its strategy
and the results of the assessment. It may be necessary to modify long-term
incentive programs, for example, to ensure they are reimbursable as designed.
How PwC can help
PwC may assist your company through its decision-making process,
including the following:
• Compensation strategy development and documentation;
• Job description documentation;
• Compensation benchmarking methodology;
• Establishment of appropriate market comparators;
• Compensation positioning relative to market and supporting performance
documentation;
• Compensation process and controls development and documentation;
• Compensation plan design; and
• Documentation for ACO program approval.
To the extent that there are gaps in audit readiness, we may assist with
assessing the potential impact of those gaps and with recommending
appropriate steps to mitigate risks of disallowance. During the audit phase,
PwC may also assist contractors with identifying flaws in the methodology
the DCAA used to arrive at its findings of unreasonable compensation and
with developing an effective response to the DCAA’s audit results.
This document is for general information purposes only, and should not be
used as a substitute for consultation with professional advisors.
PwC Government Contractor Services
To have a deeper discussion about
contractor compensation practices and
strategies, please contact:
James W. Thomas
703.918.3050
james.w.thomas@us.pwc.com
Bruce E. Clouser
267.330.3194
bruce.e.clouser@us.pwc.com
Paul M. Bailey
703.918.1478
paul.m.bailey@us.pwc.com
Rebecca Gorman
703.610.7406
rebecca.gorman@us.pwc.com
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