Finance for a government contractor runs on a different rule set than finance for a commercial company, and that gap catches organizations off guard more often than it should. Government contractor finance compliance depends on cost principles, allocation rules, and documentation standards that most accounting and finance professionals were never trained on in a standard GAAP-focused education, and the mismatch usually surfaces at the worst possible time: during an audit.

That gap is not a small compliance footnote. The Defense Contract Audit Agency oversees roughly 9,000 contractors and reviewed $788 billion in contract costs in fiscal year 2025 alone, issuing 2,480 audit reports and identifying more than $18.8 billion in audit exceptions. This is an active, high-volume oversight environment, not a theoretical risk.

How Is Finance Different for Government Contractors Compared to Commercial Companies?

Commercial finance asks whether a cost is real and properly recorded. Government contract accounting asks a further question: is this cost allowable, allocable, and reasonable under federal cost principles, and can you prove it. Costs that would be perfectly normal on a commercial income statement, certain entertainment expenses, some types of interest, portions of executive compensation, can be entirely unallowable on a government contract, and a finance team that doesn’t segregate those costs correctly ends up with the wrong number in every rate it calculates.

Government contractors are also expected to submit an annual accounting of what they spent against their contracts, known as an incurred cost submission, and that submission is subject to audit. DCAA’s own data shows why precision matters here.

In fiscal year 2025, DCAA sustained 42.6% of the dollar value of incurred cost exceptions it identified, up sharply from 31.4% the year before. In other words, when DCAA questions a cost, it holds up under further scrutiny nearly half the time.

There’s also a quieter number in that same report worth noting. The presence of DCAA oversight alone led contractors to voluntarily remove more than $3.8 billion in unallowable costs from their submissions before any audit even began. That’s a strong signal that a meaningful share of compliance problems are known internally before they’re ever flagged externally, which points to gaps in process discipline rather than gaps in knowledge.

What Are the Most Common Finance Compliance Mistakes Government Contractors Make?

A few patterns show up repeatedly across audit findings in this space. Timekeeping is one of the most persistent, since labor charging errors, whether from late timesheet entries, missing supervisor review, or hours not properly recorded against the correct contract, are a frequent source of audit findings. Because labor drives so much of a contractor’s cost base, a timekeeping problem doesn’t stay contained. It propagates through every rate built on top of it.

Unallowable costs slipping into indirect cost pools is another common issue, particularly when a company applies a blanket percentage to estimate unallowable costs rather than specifically identifying and excluding them. Auditors look for that kind of shortcut, and it rarely holds up.

Inadequate documentation is the third recurring theme. A cost can be entirely legitimate and still get questioned if the contractor can’t produce the supporting record an auditor asks for. In government contracting, the paper trail is treated as evidence in its own right, not an afterthought.

The Rules Just Changed, and Most Companies Haven’t Caught Up

This is the part of government contractor finance compliance that’s most likely to be missed right now. The FY2026 National Defense Authorization Act, signed into law in December 2025, raised the threshold for Cost Accounting Standards applicability on a contract from $2.5 million to $35 million, and raised the threshold for full CAS coverage from $50 million to $100 million, per Crowell & Moring’s analysis of the legislation. The threshold for mandatory certified cost or pricing data disclosure also rose, from $2.5 million to $10 million, for contracts entered into after June 30, 2026.

These are not minor adjustments. A contractor whose CAS obligations were calibrated to the old thresholds may find that some of its contracts no longer trigger the same compliance requirements, while others still do under modified coverage rules that remain in effect regardless of the applicability threshold. Reviewing which contracts fall where under the new rules, rather than assuming last year’s classification still holds, is now a genuine near-term priority for any contractor with contracts in the range these thresholds cover.

How Do You Build a Finance Function That Can Handle the Specific Demands of Government Contracting?

A finance function built for this environment treats compliance as a daily operating discipline rather than an annual scramble ahead of an incurred cost submission. That means timekeeping practices that hold up to scrutiny in real time, not just at fiscal year-end, and a chart of accounts and indirect rate structure designed from the start to segregate unallowable costs rather than estimate them after the fact.

It also means staying current on which regulatory thresholds apply to your contract portfolio, since the 2026 changes make last year’s compliance calibration outdated for a meaningful share of contractors. And it means treating documentation as part of the transaction itself, recorded at the time a cost is incurred, rather than reconstructed later when an auditor asks for it.

Built for This Environment, Not Adapting to It Afterward

Alliance’s Accounting Advisory team has worked directly inside government contracting environments, including leading business process redesign and change management for a publicly traded government contractor’s Deltek Costpoint implementation, and rapidly placing Costpoint-experienced professionals to stabilize a finance function after a system go-live.

Key Takeaway: Government contractor finance compliance depends on rules most finance professionals weren’t trained on, and those rules changed significantly with the FY2026 NDAA. The contractors best positioned heading into next year’s audit cycle are the ones reviewing their compliance calibration now, not the ones waiting for DCAA to point out the gap first.

Running finance for a government contractor? Let’s make sure your function is built for the specific demands of that environment.