Winning cost-reimbursable government work often leads contractors to take a closer look at their accounting environment.
Many companies assume there is a DCAA-compliant accounting system, yet auditors do not approve or certify software brands. They evaluate whether your accounting system, policies, internal controls, and daily processes satisfy established government requirements.
Understanding GovCon accounting system requirements helps your organization prepare for an SF 1408 review, support contract performance, and reduce avoidable audit findings.
| In This Article: Contractors can make accurate software decisions by understanding how DCAA auditors evaluate accounting systems, supporting documentation, and internal control procedures. |
Software Alone Doesn’t Meet DCAA Accounting System Criteria
Many software vendors advertise products for government contractors, though software is only one part of the equation.
According to the DCAA, “Accounting System” means the Contractor’s system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions, and may include subsystems for specific areas such as indirect and other direct costs, compensation, billing, labor, and general information technology.”
However, policies, written procedures, employee practices, and management oversight all contribute to an acceptable accounting system.
A contractor could purchase sophisticated government contractor accounting software and still receive audit findings if the system isn’t configured correctly or employees don’t follow established procedures. A properly managed accounting platform, paired with documented accounting practices, gives auditors the information they need during a review.
Cost Segregation Forms the Foundation
One of the first DCAA accounting system criteria auditors examine is how costs are organized within the system.
Direct costs should be charged to the appropriate contract, while indirect costs belong in established indirect cost pools using a logical allocation method. Costs also need to accumulate by contract under general ledger control so transactions can be traced through every stage of the accounting process.
An accounting structure that blends direct and indirect expenses creates unnecessary risk. Auditors expect consistent treatment across accounting periods because inconsistent classifications can affect indirect rates, contract billings, financial reporting and could be unallowable.
Companies preparing for an SF 1408 accounting system survey should confirm that the pre-award accounting system criteria require contractors to segregate direct and indirect costs, accumulate costs by contract, and maintain general ledger control.
Your Audit Trail Should Support the Entire Record
One of the biggest expectations during a DCAA accounting system review is a clear accounting system audit trail.
Auditors want to follow a transaction from beginning to end. Labor charges should flow from approved timesheets into payroll, contract job-cost records, the general ledger, and ultimately contract invoices. Vendor invoices, purchase records, and journal entries should support the same level of traceability.
DFARS 252.242-7006 requires accounting records that reconcile subsidiary ledgers with the general ledger while supporting reliable financial reporting. When documentation is organized and reconciliations are performed regularly, contractors can respond to audit requests with confidence.
Timekeeping Affects Every Contract
Labor typically represents one of the largest costs on government contracts, making compliant timekeeping a major area of review.
Current DCAA timekeeping requirements call for employees to record their own time daily using the proper charge numbers. Corrections should preserve the original entry while documenting the reason for the change. Supervisors review and approve timesheets, though employees remain responsible for accurately recording their own labor.
Current DCAA guidance explains that labor records should reconcile with payroll records and contract cost records, creating a complete chain of documentation throughout the accounting system.
Maintaining that level of consistency supports accurate labor distribution, indirect rate calculations, and contract billing.
Accounting Software Should Support Long-Term Compliance
Selecting accounting software often begins with product features, though long-term success depends on how the system supports daily operations.
A practical solution should allow contractors to:
- Separate direct and indirect costs consistently
- Accumulate costs by contract and cost objective
- Maintain indirect rate pools
- Identify unallowable costs
- Produce reliable financial reports
- Support billing that reconciles with accounting records
The DCAA explains that an accounting system may include multiple subsystems for labor, billing, indirect costs, payroll, compensation, and financial reporting. Those functions should work together to produce accurate contract cost information throughout the life of each award.
According to DCAA guidance stating that an accounting system includes the contractor’s procedures, controls, and accounting practices in addition to software, software alone doesn’t determine audit readiness.
Build an Accounting System That Supports Growth
Preparing for government contract audits starts long before an auditor requests documentation. Strong internal controls, accurate cost segregation, documented procedures, and reliable reporting all contribute to meeting what auditors expect from an accounting system while supporting GovCon accounting system requirements.
Diener & Associates has helped government contractors strengthen their accounting systems, improve DCAA compliance, and prepare for audits since 1989.
If you’re evaluating your current accounting platform, preparing for an SF 1408 review, or planning for additional cost-reimbursable work, contact our team for a consultation. We’ll help you build an accounting environment that supports compliance, strengthens operations, and positions your business for continued growth.