Upgrading to a DCAA-approved accounting system is significant for any government contractor.
With specific compliance standards set by FAR and DFARS and detailed DCAA audit procedures, a system upgrade involves more than selecting new software. It requires comprehension of regulatory expectations, internal process alignment, and maintaining an auditable trail across all accounting activities.
Every aspect of the system must support consistent, accurate reporting that meets government requirements. Careful planning at each stage can reduce the risk of audits and position the organization for long-term contract success.
Knowing the Rules That Shape System Requirements
A DCAA-approved accounting system must meet specific federal criteria before supporting compliant government contract work. At the foundation is DFARS 252.242-7006, which outlines 18 system standards that every contractor must meet.
These standards cover the segregation of direct and indirect costs, timekeeping, labor distribution, billing accuracy, and internal controls. Failure to meet these benchmarks could result in delayed approvals or payment withholds.
The SF 1408 pre-award survey often serves as the first test, particularly for new contractors seeking their initial award. It mirrors many DFARS criteria and highlights any missing system features or practices.
FAR Part 31 further shapes the system’s structure by defining what costs are considered allowable, reasonable, and allocable. Every part of the accounting process must reflect these expectations to withstand DCAA review.
The DCAA’s Contractor Information Manual (7641.90) outlines what auditors will request during floor checks, incurred cost submissions, and provisional billing reviews, making it a practical reference during system planning.
Identify and Address Gaps Early
A formal gap analysis is essential before implementing new software or outsourcing to a third-party provider.
Comparing current accounting practices against DFARS requirements and the SF 1408 checklist helps to identify areas for improvement. Common issues include reliance on spreadsheets, missing indirect-rate logic, or lack of contract-specific timekeeping.
Each weakness should be documented and categorized based on the audit risk level. Fixes should be prioritized based on the time required for implementation and their importance in passing a DCAA audit.
Build a System That Supports Cost Segregation
A compliant accounting system must separate direct and indirect costs from the start and post them to distinct cost pools. These costs must then roll up cleanly under general ledger control without requiring manual workarounds.
Contract-line-item reporting should be built into the system, as relying on external reports or custom exports increases the chance of audit inconsistencies. Any adjusting journal entries must follow documented approval workflows and remain traceable to the original transaction.
Strengthen Labor Charging From the Ground Up
Among all potential audit focus areas, labor charging consistently ranks as one of the most scrutinized.
The DCAA places significant emphasis on daily time entry, segregation of payroll and timekeeping duties, and clear accountability for recorded hours. Employees must record their time linked to specific contracts, tasks, or cost objectives.
All policies and procedures around timekeeping should be written, accessible, and consistently followed.
Turn Monthly Reporting Into a Reliable Routine
Under DFARS, all costs must be posted at least monthly, including direct charges, indirect costs, and labor entries. Any delays in posting or gaps in data reconciliation can create audit vulnerabilities, leading to contract disputes or even withheld payments.
The system must support timely provisional billing calculations and identify unallowable costs in accordance with FAR guidelines. Manual methods often miss these red flags, especially when contracts are active across multiple periods.
Built-in controls for real-time cost flagging help avoid issues later during incurred cost submissions or closeouts.
Support Compliance With Clear Documentation
A technically sound system will not meet compliance expectations if staff are unaware of policies or if documentation is incomplete.
Updated procedures must reflect the new system’s structure and be aligned with DFARS and DCAA audit expectations. These documents include a full accounting manual, labor-charging handbook, and system usage guidelines.
Training logs should be kept to demonstrate that staff received relevant instruction. DCAA audits frequently include interviews and sample requests that test both system design and actual usage. Consistent training supports consistent execution, which is what auditors ultimately evaluate.
Connect Financial Controls to Data Protection
Data protection requirements are increasingly part of the audit environment, particularly as DOD contracts bring CMMC guidelines into scope. Noting this, a new accounting system should align with cybersecurity controls that protect financial and contract data.
Record retention is another important compliance factor to consider. Compliance with FAR sections 4.703 to 4.705 requires maintaining records for specified durations based on their category. Billing records, executed contracts, time and attendance logs, and compensation documentation all have different timelines and must remain accessible even after systems change.
Respect the Timeline or Risk Payment Delays
Each phase of the upgrade or outsourcing process has its own set of risks and time requirements.
A typical mid-sized contractor transitioning from a generic ERP to a GovCon-focused solution can expect four to eight weeks for requirements and gap analysis, followed by two to six months for configuration and data migration. Findings from audits often result in added time for resolution and approval, ranging from one to three months.
Missing a milestone can lead to formal corrective action plans or payment disruptions. However, up-front planning, honest lead time estimates, and coordination with the contracting officer can help prevent unnecessary delays.
A Smarter Way to Approach DCAA Compliance
Moving to a DCAA-approved accounting system presents an opportunity to improve accuracy, strengthen controls, and mitigate audit risk throughout the organization.
Every part of the upgrade process, from cost segregation to labor tracking and documentation, supports long-term contract stability. Getting the details right promotes compliance and trust in the financial systems that power real business growth.
Diener & Associates has guided government contractors through complex financial decisions since 1989. With a hands-on approach, a commitment to personal service, and a deep knowledge of DCAA requirements, our team is ready to help turn compliance goals into real operational advantages.
To get started, schedule a consultation online or call 1-(703)-386-7864 to speak with one of our experienced CPAs.