Launching federal contract work demands an accounting system designed with compliance in mind from the outset. Federal Acquisition Regulation (FAR) standards define how costs must be recorded, classified, and supported to meet government expectations.
Early attention to system structure, documentation, and internal controls establishes a foundation that supports pre-award readiness and withstands post-award scrutiny. A properly aligned accounting framework does more than satisfy audit criteria; it supports accurate cost accumulation, transparent reporting, and informed financial management.
Establishing compliant practices from day one positions an organization for confident engagement with government clients and sustained success in the federal contracting environment.
What Compliance Really Means
A FAR-compliant accounting system aligns financial practices with federal standards so that costs are tracked, classified, and billed according to regulation.
The Defense Contract Audit Agency (DCAA) plays a central role in evaluating such systems and advising contracting officers on adequacy. Its contractor guide provides a plain-language explanation of what auditors expect, outlining how records must support cost accumulation, allocation, and reporting.
For Department of Defense contracts, the DFARS 252.242-7006 clause specifies the characteristics of an acceptable system, emphasizing segregation of direct and indirect costs, reliable job costing by contract, control through the general ledger, and periodic reconciliations.
Before an award is made, the government uses Standard Form 1408 to determine whether a contractor’s accounting system is suitably designed for federal work. The DCAA also publishes its version of this checklist, allowing contractors to self-assess readiness.
Together, these tools clarify the expectations for documentation, internal controls, and operational consistency long before an auditor visits.
When An Adequate System Becomes Necessary
Cost-reimbursement and hybrid contract types trigger the requirement for an “adequate” accounting system under FAR part 16. The Allowable Cost and Payment clause, FAR 52.216-7, governs how contractors are reimbursed for interim costs and reconciled to final indirect rates at year-end.
Therefore, a properly structured system must support interim billing accuracy and provide reliable data for incurred cost submissions. The same clause also establishes the government’s right to review all claimed costs, reinforcing the need for transparent records and consistent application of cost principles.
In many contracts, FAR 52.215-2 grants audit access to supporting documentation for direct and indirect expenses. Systems designed to meet these requirements reduce the risk of questioned costs during later reviews and promote confidence during pre-award evaluations.
Building Policies Around Federal Cost Principles
Every compliant system relies on a chart of accounts and policies aligned with FAR Part 31. Costs must meet the allowability standards of reasonableness, allocability, consistency, and adherence to contract terms.
Distinguishing between direct and indirect costs is essential, and the distinction must remain consistent in practice and documentation. Charging a similar purpose directly and indirectly in like circumstances violates this consistency requirement and can result in disallowed costs.
Written policies that define each cost type, supported by examples and escalation steps for ambiguous cases, create uniform application throughout the organization. FAR 31.202 and 31.203 provide clear definitions and form the reference point for these internal documents.
Core Elements Of a FAR-Compliant System
A compliant accounting system integrates several operational features that align with DFARS 252.242-7006 and the SF 1408 checklist. Direct and indirect costs must be segregated using distinct accounts and cost centers.
Job-costing procedures should assign all labor, materials, and other direct costs to specific contracts, tasks, or contract line items, while reconciling those records to the general ledger each month.
Timekeeping practices represent one of the most scrutinized areas. Every employee must record all hours worked daily by charge code, and supervisors must approve those records. The DCAA conducts unannounced floor checks that test employee knowledge of labor-charging policies, making consistent training a fundamental control measure.
Another essential element involves reconciliation and control within the general ledger. DFARS explicitly requires periodic reconciliation of subsidiary ledgers to the general ledger, which is best handled through a documented monthly close process. Each reconciliation should be supported by a checklist that ties subsidiary balances to general ledger accounts.
Billing processes depend on the correct application of provisional indirect rates established under FAR 42.704. Systems must use the current rate letters provided by the government and update billing calculations when new rates are issued.
Voucher preparation should produce documentation equivalent to Standard Forms 1034 and 1035 and include attachments detailing labor, indirect rates, and supporting schedules.
At year-end, incurred cost submissions are due under FAR 52.216-7. Configuring the accounting system to produce the schedules required by the DCAA’s Incurred Cost Electronically (ICE) model from day one streamlines this process.
The DCAA’s adequacy checklist helps confirm completeness before submission, reducing the likelihood of follow-up requests or delays in audit resolution.
Documentation & Retention Practices
FAR Subpart 4.7 outlines record retention rules, generally requiring documentation to be kept for three years after final payment. Longer periods may apply when audits or claims are pending.
A well-designed system should automatically tag and archive all supporting data for vouchers, incurred cost submissions, and indirect rate calculations. Establishing a clear retention calendar and assigning ownership of these records prevents loss of critical information over time.
Failure to apply the allowability standards correctly can result in penalties for expressly unallowable costs. FAR 42.709 describes these penalties and emphasizes the financial consequences of submitting proposals or rate packages that include prohibited costs.
Leadership awareness of these implications promotes stronger oversight and accountability across the organization.
Strengthening Financial Systems Through Proven Compliance Practices
A well-structured accounting system designed to meet FAR standards does more than satisfy audit expectations. It lays the groundwork for dependable financial reporting, informed management decisions, and stronger government relationships.
With decades of experience guiding government contractors, the professionals at Diener & Associates combine technical expertise with the responsiveness of a dedicated advisory team. Our CPAs help organizations build compliant systems from the ground up, providing clarity and confidence in every contract performance phase.
Schedule a consultation online or call (703) 386-7864 to connect with our team and learn how Diener & Associates can support lasting success through effective, compliant accounting solutions.