Government contract record retention: FAR compliance and audit readiness

In the complex world of government contracting, record retention is a strategic imperative. Contractors entrusted with public funds must maintain a robust documentation trail to demonstrate accountability, support cost claims and withstand audit scrutiny.

Federal Acquisition Regulation (FAR) clauses such as 52.215-2 and 42.101 grant the government broad access to contractor records, including financial statements, communications and internal policies. These clauses are embedded in contracts and serve as the foundation for audit rights, making record retention a critical part of contract lifecycle management.

What are records and who can look at them?

FAR 52.215-2 defines records as traditional accounting documents, books, accounting procedures, projections and internal communications.

Auditors may examine everything from spreadsheets and emails to board meeting minutes and employee interviews if they pertain to contract performance. Auditors may request access to these materials for up to three years after final payment or, depending on contract terms, even longer.

In early 2026, the Defense Contract Audit Agency and other oversight agencies will resume audit activity that was backlogged or delayed after the government shutdown.

Why the end of the year matters

Multiple compliance, operational and audit-driven pressures converge at the end of the year for government contractors. Year-end close activities require accurate, well-organized documentation to support accruals, revenue recognition, indirect rate monitoring and cutoff procedures.

In addition, many contractors prepare for incurred cost submissions (ICS) and provisional billing rate (PBR) updates in the first quarter, making December the ideal time to validate that supporting records are complete, accessible and aligned with FAR subpart 4.7 requirements.

As digital transformation reshapes how contractors manage data, it becomes even more critical to maintain accessible, accurate and secure records to support these year-end and audit-season demands.

The importance of record retention

Record retention plays a central role in ensuring that government funds are used appropriately. It allows auditors to verify that costs are allowable, allocable and reasonable according to contract terms. Without proper documentation, contractors run the risk of disallowed costs, delayed payments or reputational damage.

In addition to supporting audits, retention policies help maintain internal controls, resolve disputes and ensure continuity during staff transitions or system changes. As compliance standards evolve and oversight becomes more rigorous, especially around year-end close and first-quarter audit cycles, contractors must treat record retention as a key factor in maintaining eligibility for future contracts.

Most contractors rely on electronic recordkeeping, which is permissible under FAR subpart 4.703(c), provided that certain conditions are met. Contractors must ensure imaging systems preserve accurate representations of original documents, maintain effective indexing for retrieval and retain originals for at least one year after imaging. Auditors may test these systems to verify their reliability, especially when scanned documents function as audit evidence.

For contractors, a robust electronic records policy is essential to mitigate risks associated with data migration, system upgrades or cloud storage transitions.

Common pitfalls

Many contractors underestimate required retention periods or misclassify documents, often during year-end cleanup efforts, leading to premature disposal or incomplete audit trails. In addition, contractors have destroyed records too early due to misunderstandings about FAR requirements or internal policy conflicts. To avoid these issues, contractors must establish clear policies, maintain reliable systems and train staff members on the importance of record retention.

Another potential problem for contractors is relying on informal storage systems that lack structure and cannot support audits, especially when records are needed urgently for ICS, PBR updates or financial statement audits. Audit delays can occur when electronic records lack proper indexing or back-up procedures. If systems are antiquated or insufficient for the contractor’s needs, chaos can erupt.

Strategies for efficient record retention

The most successful contractors use proactive strategies for record retention. They establish centralized documentation policies that align with FAR and Office of Management and Budget guidelines.

Successful contractors also implement secure electronic systems that include audit trails, and they ensure that scanned documents meet the standards of FAR subpart 4.703(c). These systems must preserve accurate representations of original documents and allow for easy retrieval.

Staff training is another essential component, as it ensures that employees understand retention protocols and follow them consistently. In addition, periodic internal audits can identify gaps and reinforce compliance.

By integrating these practices into daily operations, contractors can become more efficient, reduce risk and improve audit outcomes.

From compliance to competitive advantage

Record retention is a strategic asset rather than a regulatory burden. Contractors who prioritize documentation and build strong retention systems are better prepared to handle audits, defend cost claims and maintain trust with government agencies.

With the year-end close cycle, first-quarter audit season and digital data challenges increasing pressure on contractors, the ability to produce complete and timely records can be a defining factor in contractor success. A disciplined approach to record retention supports long-term credibility and positions contractors for continued growth.