Government contractors operating under Department of Defense contracts are subject to stringent financial management requirements. An accounting system aligned with DCAA standards must deliver precision, transparency, and full adherence to federal regulations.
Contracting officers evaluate system adequacy before and after award, relying on defined criteria that govern cost tracking, timekeeping, and internal controls. Building to these standards strengthens audit readiness, supports compliant billing, and cultivates absolute confidence with government partners.
The Misconception of DCAA Approval
A frequent misconception in government contracting is the belief that the Defense Contract Audit Agency “approves” accounting software.
Pre-award assessments commonly use the Standard Form (SF) 1408 to determine if a system design is adequate for cost-type contracts, while post-award reviews may involve DFARS business-system audits. Recognizing this distinction is fundamental to building processes that meet expectations under federal acquisition regulations.
Core Regulatory Framework for System Design
Three primary sources define the standards that govern an acceptable accounting system. The DFARS 252.242-7006 clause outlines 18 specific requirements that contractors must meet for covered Department of Defense contracts, addressing cost segregation, ledger control, and indirect rate calculations. SF 1408 provides the pre-award design checklist to determine readiness for cost-type awards.
FAR Part 31 establishes the principles for cost allowability, allocability, and reasonableness, and defines categories of unallowable costs. Together, these documents form the backbone of system requirements, and every process, control, and reporting function must align with their provisions.
Meeting the DFARS Eighteen-Point Standard
Each DFARS 18 criterion addresses a distinct component of acceptable accounting practices. These range from maintaining a sound internal control environment and segregating direct from indirect costs to accumulating costs by contract and reconciling subsidiary ledgers to the general ledger.
Other requirements focus on timekeeping, labor distribution, monthly cost postings, and exclusion of unallowable costs as defined in FAR Part 31. Contractors must also provide cost information to monitor contract funding limits, prepare accurate billings that reconcile to cost accounts, and maintain accounting practices in accordance with CAS or GAAP, depending on applicability.
Pre-Award Requirements and SF 1408 Readiness
SF 1408 captures many of the same principles as DFARS, but focuses on whether the design of a contractor’s system is adequate before contract award. It requires segregation of direct and indirect costs, job-cost accumulation by contract, allocation of indirect costs on a logical basis, general ledger control, and monthly cost postings.
Other elements include exclusion of unallowables, cost tracking by contract line item number when required, and segregation of preproduction costs. Preparing for a pre-award survey involves aligning documentation, processes, and system configurations with SF 1408 and DCAA’s Pre-Award Accounting System Adequacy Checklist.
Timekeeping and Labor Charging Discipline
Timekeeping is one of the first control areas auditors test during an accounting system review. Employees are expected to record hours daily, use valid charge numbers, and include all hours worked, even when uncompensated.
Supervisory approval is required, and time entries must tie directly to payroll and labor distribution records. The DCAA often conducts unannounced floor checks to verify compliance with these procedures.
For organizations relying on an outsourced provider, the provider must be prepared to maintain a charge number master, publish a timekeeping policy, and reconcile labor distribution to payroll and job-cost ledgers each month.
Controlling Unallowable Costs
FAR Part 31 outlines costs that are unallowable for government billing, including entertainment and lobbying, and requires tracking of any directly related expenses.
An accounting system must be able to identify and exclude these amounts from billings, claims, and proposals. Effective controls often include account coding rules, review checklists, and periodic scans of high-risk accounts.
Documenting these controls and performing regular internal reviews can address gaps before they appear in an audit finding.
Managing Indirect Rates and Provisional Billing Rates
Under FAR 42.704, provisional billing rates must be established and updated as needed to reflect actual cost trends. DFARS requirements include monitoring cumulative costs against funding ceilings and contract limits each month.
A well-structured system provides the ability to reconcile provisional billing rates to the general ledger, incorporate updated estimates to complete, and generate reports that connect actual costs to remaining funding.
Such capabilities help contracting officers and auditors verify that costs are controlled in real time, reducing the likelihood of payment disputes.
Billing Accuracy and Contract Compliance
Billing processes must produce invoices that reconcile to cost accounts and comply fully with contract terms. For Department of Defense contracts, electronic submission through the Wide Area Workflow platform is generally required.
Effective billing practices incorporate validation of rates, ceilings, and any special contractual provisions before submission. Aligning billing records with cost data helps demonstrate compliance during post-award audits and supports smooth cash flow management throughout the life of a contract.
Addressing CAS or GAAP Requirements
When a contract is subject to the Cost Accounting Standards, the accounting system must follow CAS Board regulations. For contracts where CAS does not apply, Generally Accepted Accounting Principles govern.
Determining the applicable standard is essential, as each has its rules for cost accumulation, allocation, and reporting. Outsourced providers must configure policies to match the organization’s CAS coverage status, supported by documentation that can withstand regulatory scrutiny.
Avoiding Common Audit Findings
The DCAA frequently identifies recurring deficiencies during audits, which include failing to post costs monthly, inadequate timekeeping controls, incomplete exclusion of unallowable costs, billing records that do not reconcile to accounts, and a lack of timely payment procedures for vendors and subcontractors when those costs have been billed to the government.
Addressing these areas proactively through policy enforcement, regular reconciliations, and internal audits can reduce the likelihood of withholds or corrective action demands after a business-system review.
Building Confidence in Compliance
Adhering to DCAA standards requires more than meeting technical criteria; it calls for consistent application of sound accounting practices that withstand audit scrutiny and support the trust placed by government agencies.
At Diener & Associates, decades of experience in complex financial environments, combined with the responsiveness of a dedicated small team, allow for practical, efficient solutions that align with regulatory requirements while supporting long-term business growth.
Schedule a consultation online or call 1-(703)-386-7864 to work with our professional team of CPAs for consulting and accounting services that are customized to the needs of government contractors.