What an adequate GovCon accounting system has to do
Before a contracting officer puts a cost-reimbursable, incentive, or time-and-materials contract on your company, someone has to conclude your books can support it. That conclusion is not about your software. It is about whether your system separates costs the way the government needs them separated, and whether it does so every month rather than once a year at tax time.
Where the requirement comes from
Two documents do most of the work. Standard Form 1408 is the preaward survey of a prospective contractor's accounting system — the checklist an auditor fills in before award to say the system is acceptable for the contract type contemplated. DFARS 252.242-7006, Accounting System Administration, lists 18 criteria a system must meet to be considered acceptable on DoD work. The clause defines an acceptable system as one that gives reasonable assurance that laws and regulations are complied with, that the accounting data is reliable, that the risk of misallocation and mischarging is low, and that what you charge to a contract lines up with what you bill.
FAR does not say every contractor needs the same system. It says the system has to be adequate for the contract type. A company doing only firm-fixed-price work is held to far less than a company billing cost on a monthly voucher.
the moment you bid anything cost-reimbursable, T&M, labor-hour, or fixed-price with progress payments based on cost, the accounting system stops being an internal matter.
The 18 criteria, grouped
The clause lists 18 items. They are easier to hold in your head in four groups.
| Group | What it covers |
|---|---|
| Structure | A written description of the system. Costs accumulated under general ledger control. Direct costs segregated from indirect. Indirect costs allocated to logical pools on a consistent basis. Preproduction costs separated from production costs where applicable. |
| Identification | Costs identified by contract, and by contract line item or unit where the contract requires it. Accumulation of direct labor by employee and by cost objective. Timekeeping and labor distribution that tie to each other. |
| Screening | Exclusion from contract charges of amounts not allowable under FAR Part 31 and other contract terms. Segregation of those amounts so they can be identified rather than merely omitted. |
| Operation | Interim determination of contract cost at least monthly through routine posting. Ability to calculate indirect rates from the books. Billings that reconcile to the cost accounts, current and cumulative. Cost information adequate for pricing follow-on work and for the limitation of cost and limitation of funds clauses. |
Read the operation group twice. "At least monthly, through routine posting of the books of account" is the criterion small contractors fail most often — not because they cannot produce the numbers, but because they produce them in a spreadsheet alongside the books instead of out of them.
What actually decides the outcome
- Segregation is structural, not analytical. Direct, indirect, and unallowable have to be different accounts, not different filters applied to the same account after the fact.
- Labor ties end to end. Hours recorded by the employee flow to labor distribution, which flows to job cost, which reconciles to payroll and to the general ledger. A break anywhere in that chain is a finding.
- The close happens on a schedule. Monthly, with the job cost report produced from the same trial balance the financials come from.
- Billings reconcile. An auditor should be able to pick an invoice and trace every line back to posted cost, both for that period and cumulatively since inception.
- The system is written down. A short accounting policies and procedures manual that describes what you actually do beats a long one that describes what you meant to do.
What it is not about
There is no approved software list. DCAA does not certify products. A contractor can pass with QuickBooks Online plus disciplined structure and fail with an expensive purpose-built system that nobody reconciles. Software changes how much manual work the structure costs you; it does not supply the structure.
Nor is a passing preaward survey permanent. On DoD contracts carrying the business systems clause, a later determination that the system is inadequate can lead to payment withholding under DFARS 252.242-7005.
Frequently asked
Do we need a DCAA-compliant accounting system to bid?
Not for firm-fixed-price work. You need one before award of a cost-reimbursable, incentive, T&M, or labor-hour contract, or fixed-price work with progress payments based on cost. Many contractors get the survey scheduled after they are in line for award, which is late — the structural work takes longer than the audit.
Does DCAA approve or certify accounting software?
No. There is no approved product list. The audit looks at how your system is set up and operated, not at the vendor name. Purpose-built GovCon systems reduce the manual work; they do not create compliance on their own.
How long does it take to get a system ready?
For a company with clean books and no cost-type history, the chart of accounts, pool structure, timekeeping policy, and written procedures are usually a matter of weeks. The longer item is running the system for a period or two so there is actual posted activity for an auditor to look at.
What happens if the system is found inadequate after award?
On DoD contracts with the contractor business systems clause, the contracting officer can withhold a percentage of payments until the deficiencies are corrected. Findings also travel — they surface in future preaward surveys and in due diligence.
Related
Building a GovCon chart of accounts
A chart of accounts that segregates direct, indirect, and unallowable costs by construction — so compliance is a byproduct of posting, not a cleanup project.
Read →Direct vs. indirect costs in a GovCon business
How to decide whether a cost is direct, indirect, or unallowable — and why consistency matters more than the individual call.
Read →What DCAA looks at
The audits a small government contractor actually encounters, what each one examines, and what to have ready before the notification letter arrives.
Read →