Many firms rely heavily on accounting applications that appear to support government contract requirements. Yet, a closer look often reveals gaps that can place contract eligibility and cash flow at risk.
Regulatory expectations under FAR, DFARS, and, when applicable, CAS demand a full accounting system that integrates sound methods, carefully documented procedures, and reliable controls.
Software serves as one component within that broader framework, and its performance is evaluated against detailed criteria that auditors reference during pre-award surveys and subsequent reviews.
A dependable foundation requires alignment between the tool in use, its configuration, and the policies that govern daily activity. Misalignment can leave a contractor vulnerable during DCAA examinations, especially when billing, timekeeping, indirect rate structures, or the treatment of unallowable costs lack clarity.
In This Article: Readers will find a clear breakdown of how federal rules define an acceptable accounting system, how software fits into that larger structure, and what practical factors signal true DCAA alignment.
What DCAA Compliance Truly Assesses Within An Accounting Environment
Contractors often encounter marketing claims suggesting that a software platform delivers automatic alignment with federal expectations, yet regulatory agencies assess something far broader.
The DCAA evaluates an entire accounting system that incorporates documented methods, disciplined procedures, and reliable internal controls, all supported by IT tools capable of producing data suitable for government scrutiny.
Auditors reference DFARS 252.242-7006 and SF 1408 to determine whether a system can accumulate and report costs by contract, separate direct and indirect expenses, maintain accurate timekeeping, and exclude unallowable charges in accordance with FAR Part 31.
A software product may contribute to this framework, although success hinges on how the system is designed and operated on a daily basis. Federal reviewers consistently remind contractors that no application carries an official approval status, so the overall configuration and control environment carry the most weight during examinations.
Why DFARS & FAR Requirements Define Performance Expectations Far Beyond Software Features
Many organizations assume that selecting a program marketed for government contracting satisfies expectations, yet DFARS Subpart 242.75 presents a more demanding picture.
Auditors look for evidence that the accounting structure supports consistent indirect rate allocation, clear identification of cost objectives, timely posting cycles, and reconciliation between subsidiary ledgers and the general ledger.
FAR Part 31 reinforces these expectations since reasonableness, allocability, and allowability standards must be reflected in day-to-day processes. Cost data submitted in vouchers and invoices must align with FAR 52.216-7, meaning billing outputs must reconcile with internal records without missing detail or unsupported entries.
Meeting these expectations requires thoughtful implementation, including written policies that identify unallowable costs and maintain separation between allowable activity and charges prohibited by regulation. Software can provide the mechanics, although the contractor’s operating structure determines whether auditors view the system as dependable.
How System Design & Configuration Influence Audit Outcomes In Pre-Award & Post-Award Settings
Federal agencies evaluate system design during pre-award surveys using SF 1408, focusing on whether the accounting environment can support contract performance once work begins.
Auditors request walkthroughs, review internal procedures, and examine configuration choices that affect cost tracking, labor charging, and indirect pool structure. Pre-award reviews emphasize design suitability, so the ability to illustrate how the system will function holds significant weight.
After award, the focus expands. DFARS business systems rules allow contracting officers to withhold payments if weaknesses in accounting practices emerge, especially when billing accuracy, cost segregation, or the treatment of unallowable charges becomes questionable.
Payment withholds can reach meaningful levels, creating financial strain for contractors that rely on steady reimbursement. A software product alone cannot prevent such outcomes; auditors assess how processes, controls, and documentation support compliance over time.
Timekeeping, Labor Distribution, & Indirect Rates As Foundational Elements In Compliance Assessments
Labor practices influence every examination because timekeeping directly links to contract charges and to indirect rate calculations. Regulators expect daily time entry, supervisor approval, and reconciliation of labor distribution to payroll and project cost records. Inconsistent processes or gaps in documentation often trigger findings during both pre-award and business systems audits.
Indirect cost structures require equal attention. Pools and bases must reflect reasonable allocation logic that aligns with FAR and CAS requirements where applicable. If a system cannot apply rates consistently or fails to maintain clarity between direct and indirect activity, cost reporting becomes unreliable.
Software can automate the rate application process, provided the underlying design supports defensible allocation methods. Auditors will examine the pool composition, supporting schedules, and the flow of indirect rates to contract costs, so a thoughtful structure is essential.
Record Retention, Audit Trails, & Data Integrity As Non-Negotiable Expectations Under Federal Rules
FAR Subpart 4.7 outlines retention requirements that influence system selection and configuration. Contractors must maintain records for multiple years after final payment, which means software must preserve transaction detail, supporting documents, and audit trails without premature deletion or overwriting.
Auditors frequently seek access to historical entries to verify indirect rate calculations, billing modifications, or the handling of unallowable costs. Inadequate audit trails can lead to findings that jeopardize system approval under DFARS 252.242-7006.
Cloud-based systems or outsourced accounting arrangements must still provide contractors with reliable access to the underlying data, since responsibility for producing records remains with the contractor. Data integrity, controlled access, and verifiable logs are now essential components of the broader accounting environment.
Assessing Whether Outsourced Accounting Arrangements Genuinely Support Compliance
Organizations considering outsourced support often expect a ready-made solution, yet regulatory requirements place responsibility for documentation, system design, and audit response squarely on the contractor.
External providers may supply software, rate modeling, billing support, and compliance guidance. However, auditors still look to the contractor to explain processes, provide narratives for SF 1408 criteria, and participate in walkthroughs. Effective outsourced arrangements must include clear documentation, well-structured cost accounting practices, and support for record retention obligations.
Providers should demonstrate how their configuration aligns with DFARS criteria, FAR Part 31 principles, and CAS requirements for contractors approaching coverage thresholds. Without such alignment, an outsourced service can leave gaps that surface during audits, creating setbacks that could have been avoided through a more deliberate system design.
Moving Forward With Confidence In a Compliant Accounting Framework
A sound accounting environment relies on well-structured processes, strict controls, and software configured to support federal expectations, and organizations that invest time in aligning these elements place themselves in a far stronger position during audits.
Diener & Associates has supported government contractors for decades, providing guidance shaped by hands-on experience, close client relationships, and a commitment to practical problem solving. Our firm approaches each engagement with the perspective of a long-term partner, helping businesses strengthen their systems so they can pursue opportunities without uncertainty.
Schedule a consultation online or connect with our team at (703) 386-7864 to work with CPAs who understand the demands of federal contracting and are ready to assist with accounting and advisory needs.