One Agency, One Team, One Direction
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Accounting System
Requirements and Pre-
Award Audits
Further information is available in the
Information for Contractors Manual under Enclosure 2
One Agency, One Team, One Direction
Prior to First Cost Type
Contract Award
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Contracting Office or DCMA conducts Pre-award Survey to
consider responsibility of prospective contractor
Design of the Accounting System is part of the Preaward
Survey (SF 1408 Criteria)
Link: https://www.dcaa.mil/Checklists-Tools/Pre-award-Accounting-System-Adequacy-Checklist/
DCAA is requested to evaluate design of Accounting System
and report back to Contracting Office or DCMA
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Contractor Qualifications
Responsible Prospective Contractor Criteria:
Adequate financial resources to perform the contract
Ability to comply with the required or proposed delivery or performance
schedule, considering the firm’s existing commercial and governmental
business commitments
A satisfactory performance record
A satisfactory record of integrity or business ethics
The necessary organization, experience, accounting, operational
controls, and technical skills to perform the contract
The necessary production, construction and technical equipment and
facilities
Eligibility to receive the award under applicable laws and
regulations
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One Agency, One Team, One Direction
Pre-award Audit Objectives
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Evaluates design of Accounting System to determine if it is
acceptable for prospective contract
Contractor should be prepared to demonstrate how
accounting system design satisfies SF 1408 during audit
fieldwork stage
DCAA Pre-Award Accounting System Audit Program:
https://www.dcaa.mil/Portals/88/Documents/Guidance/Dire
ctory%20of%20Audit%20Programs/17740%20Preaward%
20Survey%20of%20Prospective%20Contractor%20Accoun
ting%20System%20AP.pdf?ver=w0ujMZRuYOzWedf4w7EY
Vg%3d%3d
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Standard Form 1408 Criteria
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Acceptable Accounting System
DFARS 252.242-7006(a)(1):
“a system that complies with the system criteria in paragraph
(c) of this clause to provide reasonable assurance that—
(i) Applicable laws and regulations are complied with;
(ii) The accounting system and cost data are reliable;
(iii)Risk of misallocations and mischarges are minimized; and
(iv)Contract allocations and charges are consistent with
billing procedures.”
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One Agency, One Team, One Direction
Defining an Accounting System
DFARS 252.242-7006(a)(2):
“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”
May include subsystems for specific areas such as:
Billing
Labor
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Total Contract Costs
The total cost of a contract is the
sum of the direct and indirect costs
allocable to the contract.
While the total cost of a contract
includes all costs properly
allocable to the contract, the
allowable costs to the Government
are limited to those allocable costs
which are allowable pursuant to
Part 31 and applicable agency
supplements.
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Direct Versus Indirect Costs
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DFARS 252.242-7006(c)(2) requires proper
segregation of direct costs from indirect costs.
Direct Cost is any cost that is identified specifically
with a particular final cost objective.
Indirect cost means any cost not directly identified
with a single, final cost objective, but identified
with two or more final cost objectives or an
intermediate cost objective
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Defining Costs
DFARS 252.242-7006(c)(3) requires
identification and accumulation of direct costs
by contract.
DFARS 252.242-7006(c)(4) requires a logical
and consistent method for the accumulation
and allocation of indirect costs to intermediate
and final cost objectives.
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One Agency, One Team, One Direction
Direct Cost
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Direct costs are not limited to items that are
incorporated in the end product as material or labor.
No final cost objective shall have allocated to it as a
direct cost any cost that has been included in an
indirect cost pool.
Direct costs of the contract shall be charged directly to
the contract.
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Definition of an Indirect Cost
Identified with two or more final cost objectives
or an intermediate cost objective.
An indirect cost is not to be allocated to a final
cost objective if other costs incurred for the same
purpose in like circumstances have been included
as a direct cost of any other final cost objective.
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One Agency, One Team, One Direction
Indirect Cost Overview
The number of indirect cost accounts in a
single company can range from one to
hundreds.
The indirect structure needs to be tailored to
your company and how it operates.
In general, indirect cost accounts fall into two
broad categories:
Overhead
General and Administrative (G&A)
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Overhead Pools
Cost related to support of specific operations
Examples of indirect cost rates include:
Material Overhead
Manufacturing Overhead
Engineering Overhead
Site Overhead
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General and Administrative
These are management, financial, and other expenses
related to the general management and administration of
the business unit as a whole. To be considered a G&A
expense of a business unit, the expenditure must be
incurred by, or allocated to, the general business unit.
Examples of G&A expenses include:
Salary and other costs of the executive staff of the corporate
or home office
Salary and other costs of such staff services as legal,
accounting, public relations, and financial offices
Selling and marketing expenses
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Allocation Base Overview
Indirect costs should be allocated based on benefits accrued
to intermediate and final cost objectives.
Allocation base must be reasonable.
There must be a relationship between the selected allocation
base and the pool costs.
For example, training costs in the overhead pool are not
necessarily caused by a particular cost objective, but the
cost objectives might benefit from the training of
employees. In that case, training would be related and
benefit the labor dollars incurred on contracts/final cost
objective
.
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One Agency, One Team, One Direction
Allocation Base Examples
In general, typical allocation bases for Overhead and G&A are:
Overhead
Direct Labor Dollars
Direct Labor Hours
Direct Material Dollars
G&A
Total Cost Input (Total direct and indirect costs minus G&A)
Value Added (Total Cost Input less subcontracts and direct
materials)
Single Cost Element (e.g. Direct labor dollars)
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Allowability
FAR 31.201-2
A cost is allowable only when the cost complies with
all of the following requirements:
Reasonableness
Allocability
Terms of the contract
Applicable Cost Accounting Standards (CAS)
Any Limitations Set forth in the entire Subpart
31.2
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Reasonableness
FAR 31.201-3
FAR considers a cost to be reasonable if:
In its nature and amount, it does not exceed that
which would be incurred by a prudent person in
the conduct of competitive business.
It is the contractor's responsibility to establish that
each cost is reasonable.
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Allocability
FAR 31.201-4
A cost is allocable to a government contract if it:
Is incurred specifically for the contract;
Benefits both the contract and other work, and can
be distributed to them in reasonable proportion to
the benefits received; or
Is necessary to the overall operation of the business,
although a direct relationship to any particular cost
objective cannot be shown.
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Contract Terms
Specific types of cost are often addressed in a contract or
request for proposal (RFP).
However, the contract terms can only be more restrictive
than the other factors that must be considered in
determining cost allowability, not less. In other words, the
contract terms cannot allow a cost that is:
Unreasonable
Improperly measured, assigned and allocated to the
contract
Unallowable in accordance with specific cost principles
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One Agency, One Team, One Direction
Accounting for Contract Costs
The accounting system must be able to
accumulate and report the costs for each final cost
objective; i.e., government contract.
Direct costs of the contract, plus
Allocation of applicable indirect costs, less
Unallowable Costs
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One Agency, One Team, One Direction
DFARS Accounting Requirements
DFARS 252.242-7006(c) requirements:
(5) Accumulation of costs under general ledger control
(6) Reconciliation of subsidiary cost ledgers and cost
objectives to general ledger
(7) Approval and documentation of adjusting entries
(11) Interim (at least monthly) determination of costs charged
to a contract through routine posting of books of
accounts
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One Agency, One Team, One Direction
Labor System
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DFARS 252.242-7006(c) requirements:
(9) A timekeeping system that identifies employees’
labor by intermediate or final cost objectives
(10) A labor distribution system that charges direct
and indirect labor to the appropriate cost
objectives
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Timekeeping
Labor should be charged to intermediate and final cost
objectives based on a timekeeping document (paper or
electronic timecards) completed and certified by the
employees and approved by the employees’ supervisors.
Employees should fill out timesheet on a daily basis and
include all hours worked including uncompensated
overtime.
Labor cost distribution records should reconcile to payroll
records and labor distribution records should trace to and
from the job cost ledger and general ledger accounts.
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One Agency, One Team, One Direction
Unallowable Costs
DFARS 252.242-7006(c)(12) requires “Exclusion from costs
charged to Government contracts of amounts which are not
allowable in terms of Federal Acquisition Regulation (FAR)
part 31, Contract Cost Principles and Procedures, and other
contract provisions”
Therefore, contractors need written policies and
procedures to identify and exclude unallowable costs.
Unallowable costs need to be identified and excluded from
any billings, claims, and proposals applicable to a
Government contract.
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One Agency, One Team, One Direction
Costs by Contract Line Item
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DFARS 252.242-7006(c)(13) requires “Identification of costs
by contract line item and by units (as if each unit or line item
were a separate contract), if required by the contract”
Therefore, the accounting system needs to be able to
expand beyond a project number.
Each job needs to be expanded to the requisite level of
detail as determined by contract terms.
Make sure the contract is adequately briefed to determine
what this level might be.
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Invoicing Requirements
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DFARS 252.242-7006(c) requirements:
(16) Billings that can be reconciled to the cost
accounts for both current and cumulative
amounts claimed and comply with contract
terms
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Overview of Invoicing
Contractors should only bill cost which comply with FAR 52.216-7
Recorded costs that have been paid by cash, check, or other form of
actual payment for items or services purchased directly for the
contract
When the Contractor is not delinquent in paying costs of contract
performance in the ordinary course of business, costs incurred, but
not necessarily paid, for supplies and services purchased directly for
the contract and associated financing payments to subcontractors,
provided payments determined due will be made:
In accordance with the terms and conditions of a subcontract or
invoice; and
Ordinarily within 30 days of the submission of the Contractor’s
payment request to the Government
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Billings need to be based on current contract provisions.
The total amount billed should not exceed any contract,
work order, funding limitation, or any other contract ceiling
amount.
Important to brief contract to identify billing provisions,
including but not limited to:
Restriction of billing frequency
Special withholding provisions
Contractual unallowable costs
A contractor needs to reconcile booked costs to billed costs.
Basis of Invoiced Costs
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Cost Accounting Information
DFARS 252.242-7006(c)(15) requires “Cost accounting
information, as required—
(i) By contract clauses concerning limitation of cost (FAR
52.232-20), limitation of funds (FAR 52.232-22), or
allowable cost and payment (FAR 52.216-7); and
(ii) To readily calculate indirect cost rates from the books of
accounts”
Interim rates should be routinely monitored.
At least monthly, an employee needs to be responsible for
monitoring total contract expenditure against contract
limitations on price or cost.
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DFARS Cost Accounting
Requirements
DFARS 252.242-7006(c) requires:
(17) Adequate, reliable data for use in pricing follow-
on acquisitions; and
(18) Accounting practices in accordance with
standards promulgated by the Cost Accounting
Standards Board, if applicable, otherwise,
Generally Accepted Accounting Principles.
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Management Reviews/Internal
Audits
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DFARS 252.242-7006(c) requires:
(8) Management reviews or internal audits of the
system to ensure compliance with the
Contractor’s established policies, procedures, and
accounting practices
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Common Areas of Noncompliance
Contractors not making Interim (at least monthly)
determination of costs charged through routine
posting to books of account
Failure to properly segregate direct and indirect
costs
Improper timekeeping
Failure to exclude unallowable costs
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Areas of Noncompliance
Inadequate procedures to ensure that
subcontractor and vendor costs are only included
in billings if payment to subcontractor or vendor
will be made in accordance with terms and
conditions of the subcontract or invoice and
ordinarily within 30 days of the contractor’s
payment request to the Government.
One Agency, One Team, One Direction
Frequently Asked Questions
o How do I get a DCAA approved government accounting
system?
You cannot. There is no such thing as a DCAA approved
government accounting system.
o How do I request a DCAA audit of my accounting system?
DCAA does not perform audits requested by a contractor.
DCAA only performs these audits based on a request from
a federal entity who is responsible for determining the
acceptability of a contractor’s system.
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One Agency, One Team, One Direction
FAQs Continued
Is QuickBooks or any other accounting software
applications acceptable accounting system for
federal contracting?
An accounting system is more than just a
software package. It includes accounting
methods, procedures, and controls. Many
accounting software application can be part of an
acceptable accounting system or set up in a
manner that fails to meet the requirements of an
acceptable system.
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DCAA Internet Resources
Guidance
Audit Process Overview – Information for Contractors Manual
Directory of Audit Programs
Contract Audit Manual
Select Area of Cost Guidebook (FAR 31.205 Cost Principles)
Links to Acquisition Regulations
Checklists and Tools
Cost of Money Rates
Incurred Cost Electronically (ICE) Model
Contractor Submission Portal
Adequacy Checklists - Preaward Accounting System, Contract Pricing
Proposal, Forward Pricing Rate Proposal, Incurred Cost Submission,
Termination Settlement Proposal.
Frequently Asked Questions For Contracting Officers, Contractors and
COVID-19
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Small Business Outreach Survey
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recent experience with the DCAA
Small Business Program, as we are
committed to providing the best
guidance possible and
strengthening our nation's Defense
Industrial Base. By participating in
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provide you with even better
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Questions/Comments
Katelyn Rigle
Financial Liaison Advisor- Small Business Coordinator
Headquarters – Operations Audit Liaison Division
8725 John J. Kingman Road
Fort Belvoir, VA 22060
VoIP: (571) 448-6376
E-mail: [email protected]
