The Federal Acquisition Regulation (FAR) establishes the rules and requirements that govern how federal agencies acquire goods and services from contractors. It covers the acquisition process from planning and solicitation through award, administration, and closeout. The FAR is organized into parts covering subjects such as competition, contract types, cost principles, socioeconomic requirements, contract administration, and clauses. Individual agencies may also issue supplements that add agency-specific requirements. The Department of Defense, for example, uses the Defense Federal Acquisition Regulation Supplement (DFARS) alongside the FAR. The FAR is also being streamlined through the Revolutionary FAR Overhaul, which is intended to reduce unnecessary language while preserving core statutory and government-wide procurement requirements.
A contract does not automatically contain every FAR requirement. The Contracting Officer determines which provisions and clauses apply based on factors such as contract type, dollar value, acquisition method, and whether the purchase involves commercial products or services. Applicable clauses are included in the solicitation and contract. Instead of printing the entire text, the contract may simply identify a FAR clause by its number and title and incorporate it by reference. The clause still applies as though its full text were included in the contract. Contractors should review all applicable clauses before bidding and again after award because they may include requirements for billing, records, audits, cybersecurity, subcontracting, reporting, and performance.
FAR Part 31 (Contract Cost Principles and Procedures) when costs charged to certain government contracts are allowable. In general, a cost must be reasonable, allocable to the contract, consistent with applicable accounting standards, permitted by the contract, and within any applicable FAR limitations. Certain costs, including specified lobbying activities, bad debts, and certain fines, penalties, and legal costs, may be unallowable under FAR rules. Contractors must identify and exclude unallowable costs from billings, claims, and proposals and maintain adequate supporting documentation for costs they claim. Categories such as legal fees and transaction-related costs may require additional review because allowability depends on the purpose of the cost, contract terms, and applicable FAR limitations.
Many FAR contracts give the government rights to examine contractor books, records, accounting practices, and supporting data related to claimed or proposed costs. The exact audit rights depend on the contract and clauses incorporated into it. For defense contracting, The Defense Contract Audit Agency or DCAA performs contract audits and provides financial advice to acquisition officials, including reviews of whether costs are allowable, allocable, and reasonable and whether contractor systems comply with applicable requirements. Records may need to remain available for years after final payment. Forensic Accounting can become relevant when disputed costs, inadequate records, suspected fraud, or serious financial issues require deeper analysis and reconstruction.
Common compliance failures include charging expressly unallowable costs, allocating indirect costs incorrectly, failing to segregate unallowable expenses, submitting unsupported costs, overlooking contract-specific clauses, and using accounting practices that do not match FAR or applicable Cost Accounting Standards. Problems can also arise when contractors certify indirect cost proposals without reviewing the underlying data. Strong government contracting compliance requires controls that catch these issues before submission. Consequences can include questioned or disallowed costs, repayment, reduced reimbursement, penalties, audit findings, disputes with the contracting officer, and financial exposure. Knowingly submitting false costs can create legal risk, including False Claims Act (FCA) or criminal referrals.
Is the FAR applied differently to commercial item contracts?
Yes. Commercial product and commercial service acquisitions generally use FAR Part 12, which follows more streamlined commercial practices. Some laws and clauses that apply to noncommercial acquisitions do not apply, but the clauses actually included in the contract remain binding.
What is DFARS and how does it relate to FAR?
DFARS is the Defense Federal Acquisition Regulation Supplement. It supplements the FAR for Department of Defense acquisitions. Defense contractors may therefore have to follow both FAR requirements and additional DFARS rules, clauses, procedures, cybersecurity requirements, and other specific defense-related obligations.
Do subcontractors carry the same FAR obligations as primes?
Subcontractors do not automatically have the same FAR obligations as prime contractors. They must follow FAR or agency requirements that are specifically required to flow down to them, along with requirements that directly apply to subcontractors. Primes should identify the required FAR Clause flowdowns for each subcontract.
How long does a DCAA audit typically take to complete?
There is no single DCAA audit timeline. In FY2025, average elapsed time was 92 days for forward-pricing audits, 208 for incurred-cost audits, 264 for systems/CAS/TINA audits, and 148 for claims and terminations. Complexity and record quality can significantly affect timing.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Lindsey Sykes, partner
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