Under the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS), an accounting system is deemed “adequate” only when both its internal procedures and supporting software meet defined compliance standards.
While QuickBooks delivers general ledger functionality, it does not satisfy the complete range of requirements examined during DCAA or DCMA reviews. A compliant accounting framework must address timekeeping, indirect rate structures, cost segregation, and audit-ready documentation that demonstrates adherence to federal expectations.
Many contractors learn that success under government oversight requires integrated systems and disciplined procedures extending well beyond standard bookkeeping practices.
What “Adequate” Means In Federal Terms
Federal agencies measure accounting adequacy through the standards outlined in the FAR and DFARS.
For Department of Defense contractors, DFARS 252.242-7006 defines an acceptable accounting system, detailing 18 specific criteria that address internal controls, segregation of direct and indirect costs, job-cost accumulation, labor distribution, and reconciliation to the general ledger.
Before a cost-type contract is awarded or progress payments are authorized, contractors are evaluated through the Standard Form 1408 Pre-Award Survey. That review determines whether an accounting system can properly segregate costs, identify unallowable costs, maintain accurate daily timekeeping, and reconcile job costs to the general ledger.
DCAA auditors use SF 1408 and its public checklist to test the design and readiness of an accounting setup. Passing this review depends far more on documented processes and internal controls than on the brand of accounting software in use.
Where General Ledger Software Reaches Its Limits
QuickBooks and similar programs handle bookkeeping efficiently, but are not designed around government cost principles. In their standard configuration, they record transactions without the structural layers needed for DCAA compliance.
Timekeeping, indirect rate calculations, job-cost accumulation, and billing under FAR 52.216-7 require functions and controls extending well beyond general ledger work.
A compliant system must integrate daily time entries, approved labor distribution, indirect rate logic, and unallowable-cost tracking. Without those components, auditors will determine that the accounting system is inadequate, regardless of whether the general ledger balances.
Timekeeping & Labor Distribution Requirements
Government auditors expect daily certified time entries, supervisor approval, and an auditable trail connecting labor charges to cost objectives. The DCAA performs unannounced floor checks to confirm that employees are present and that charging time is accurately recorded.
DFARS requires the accounting system to identify labor by cost objective and to distribute it properly between direct and indirect categories. Standard bookkeeping software does not provide that level of documentation control without the use of additional tools.
Outsourced GovCon bookkeeping services frequently deploy compliant electronic timesheet systems, write procedures for daily entry and approvals, and train staff to respond correctly during audits. That combination of technology and written policy creates the reliable evidence that DCAA reviewers seek.
Job Cost Accounting
Federal contracts, particularly those with cost-type and progress-payment arrangements, depend on the accurate accumulation of direct costs by project or contract.
Indirect expenses need to be allocated in a rational, uniform manner before being assigned to both intermediate and ultimate cost targets. Monthly postings under general ledger control are mandatory.
QuickBooks can record project transactions, but it does not automatically produce the rate schedules, pool-to-base logic, and reconciliation documentation expected by auditors. Effective support involves designing indirect cost pools, calculating rates, performing monthly allocations, and demonstrating that subsidiary job-cost ledgers tie to the general ledger.
An outsourced team familiar with government accounting standards provides that discipline and creates rate workpapers that support provisional and final indirect cost proposals.
Identifying & Excluding Unallowable Costs
Federal cost principles require the exclusion of unallowable expenses such as entertainment, alcohol, or travel above per diem limits. FAR Part 31 and CAS 405 outline the requirements for recording and presenting unallowables.
Without a structured method to flag and segregate these costs, billings and proposals may contain unallowable items, leading to questioned costs and audit findings. A properly configured accounting system includes flagged accounts, workflows that route questionable charges for review, and month-end scans to identify prohibited costs.
Outsourced bookkeeping support often implements those controls and conducts regular reviews to maintain compliance, reducing the risk of disallowed expenses during incurred cost audits.
Billing Architecture & Cost Voucher Control
Cost-type contracts require billing under provisional billing rates that approximate expected final rates. These rates are approved by the contracting officer or cognizant auditor under FAR 42.704. Billings must reconcile to cumulative costs recorded in the books, and any ceilings or contract line item limitations must be respected.
DCAA monitors vouchers for incorrect rates, cumulative mismatches, and billing above contractual limits. A compliant billing process ties every interim voucher to current job-cost data, maintains rate documentation, and updates provisional billing rates as conditions change.
A well-organized accounting system supported by DCAA-experienced professionals manages these tasks and avoids the overbilling issues that trigger audit findings.
Documentation, Policies, & Audit Readiness
An adequate accounting system extends beyond software configuration to the documentation that supports its operation. DCAA auditors expect to see written policies describing timekeeping, labor distribution, indirect rate computation, and billing.
The current DCAA Pre-Award Survey Audit Program requests narrative responses for each SF 1408 criterion and evidence that procedures are in operation. Outsourced GovCon bookkeeping typically includes the creation and upkeep of this documentation, the preparation of mock audit packages, and ongoing self-assessment using the DCAA checklist.
Proper recordkeeping establishes a continuous state of readiness, helping management respond confidently to auditor inquiries.
Building Confidence In Compliance & Growth
Government accounting success depends on more than balancing books. Meeting DCAA expectations requires structured processes, documented controls, and consistent oversight that general-purpose software cannot provide alone.
At Diener & Associates, decades of experience serving government contractors have shown that sound systems create stronger businesses. Each engagement combines technical accounting expertise with a partnership approach that helps organizations operate confidently under federal review while focusing on growth.
To build or enhance a compliant accounting system, reach out to our certified public accountants at Diener & Associates by calling (703) 386-7864 or scheduling an online consultation.