Maintaining an efficient and compliant accounting system is an essential element for businesses bidding on and maintaining government contracts. One primary component of a compliant accounting system is Standard Form 1408 (SF1408), which outlines the criteria for an acceptable accounting system as defined by the Defense Contract Audit Agency (DCAA). This article aims to provide a comprehensive understanding of the SF1408 and its significance for DCAA approved accounting systems.
What Is The SF1408 and Why Is It Important?
The SF1408 plays a vital role in the government contracting process. It encompasses a comprehensive set of criteria that contractors’ accounting systems must meet to be deemed acceptable by the DCAA. The SF1408 is also an integral component of the pre-award survey process, during which the DCAA evaluates the design of a contractor’s accounting system and determines its acceptability for the prospective contract.
To conduct this evaluation, the DCAA gains insights into the contractor’s accounting system, closely monitoring every transaction. This rigorous oversight ensures that the contractor’s financial system and procedures meet each requirement of the SF1408 form, which focuses on several key areas, including:
- Cost allocations, indirect, and unallowable costs
- Billing, payments, and vouchers
- Operating accounting procedures
- Labor distribution
- Timekeeping system
- Generally accepted accounting principles (GAAP)
The importance of the SF1408 stems from its influence on a contractor’s ability to secure and manage government contracts. Adequate and compliant accounting systems signal to government agencies that the contractor can handle the financial aspects responsibly and effectively, enhancing their credibility and chances of winning future contracts.
Conversely, non-compliant or inadequate systems can cause issues such as disqualification from bidding, contract awarding delays, or even termination. Non-compliance may also invite increased scrutiny from the DCAA, leading to further audits, investigations, and penalties.
The SF1408 provides a comprehensive set of criteria that contractors must meet to ensure that their accounting systems are compliant with DCAA requirements. This section will take a step-by-step look at each of the SF1408’s requirements:
- Segregation of Direct and Indirect Costs: Develop a system to separate direct costs (specific to individual contracts) from indirect costs (not directly attributable to one contract) to accurately allocate costs and prevent mischarging.
- Accumulation and Identification of Direct Costs by Contract: Assign unique identifiers to each contract, allowing for precise tracking and accumulation of costs related to specific contracts.
- Allocation of Indirect Costs: Establish a logical, consistent method for allocating indirect costs to contracts, ensuring equitable distribution of expenses among various contracts.
- General Ledger Control: Accumulate and record all contract costs in the general ledger to maintain proper financial control and reporting.
- Timekeeping System: Implement a reliable timekeeping system to track and record employee labor hours, allocating them to the appropriate intermediate or final cost objectives.
- Labor Distribution System: Create a system to distribute labor costs between direct and indirect cost objectives based on the timekeeping records.
- Interim Determination of Contract Costs: Regularly (at least monthly) determine and report costs charged to each contract to ensure accurate tracking and management of expenses.
- Exclusion of Unallowable Costs: Understand the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS) to identify and exclude unallowable costs from contract billings and claims.
- Identification of Costs by Contract Line Item and Units: If specified in the contract, track costs at the contract line item level and by units to maintain detailed cost records.
- Segregation of Pre-Production and Production Costs: Separate costs incurred during the pre-production phase from those incurred during the production phase to prevent misallocation of expenses.
- Allocation of Costs Consistent with Disclosure Statement: If required to submit a Disclosure Statement, ensure that the DCAA approved accounting system allocates costs following the disclosed cost accounting practices.
- Financial Management System for Allowability of Costs: Implement a financial management system capable of determining cost allowability based on FAR Part 31 and relevant agency supplements.
- Reliable Data for Pricing Follow-on Acquisitions: Maintain accurate and reliable historical cost data to support pricing for future contract acquisitions.
- Accounting Practices in Accordance with Disclosed Practices or Cost Accounting Standards: Ensure that accounting practices align with the contractor’s disclosed practices or applicable cost accounting standards.
- Subcontract Price Verification: Establish procedures to verify subcontractor prices using cost or pricing data when required by the contract or regulations.
- Reliable Data for Management Review and Analysis: Maintain accurate and reliable cost data to support management’s review and analysis of contract expenses.
- Written Policy on Unallowable Costs: Develop and maintain a written policy outlining the treatment of unallowable costs, ensuring consistency with federal regulations.
- Training and Guidance for Employees: Provide appropriate training and guidance to employees responsible for determining and managing contract costs, ensuring that they understand regulations, requirements, and best practices for DCAA compliance.
Stay DCAA Compliant With Professional Help
Understanding and complying with the SF1408 is a necessity for businesses in the government contracting space. By meeting the DCAA’s stringent criteria, contractors can enhance their credibility, increase their chances of winning contracts, and ensure long-term success in the competitive government contracting arena.
Partner with Diener & Associates for premium consulting and advisory services to improve your business and DCAA approved accounting system compliance. Our expert team of CPAs can perform audits, closely monitor accounting principles and compliance, and strategically reduce underlying risk. Contact Diener & Associates today and secure a solid foundation for your government contracting endeavors.