Meg McKeown

(O) 505-980-4636


Are You Adequate?

Now that I got your attention, let me ask this question in a slightly different way. Is your accounting system adequate for ‘accumulating and billing costs to government contracts’?

Either your system is adequate to accumulate and bill costs to Government contracts or it’s not. So what’s the big deal? Well this may stop a company from being awarded a contract. If you have contracts and your accounting system is found inadequate, a percentage of progress payments may be suspended until the accounting system is deemed adequate again. In other words, it hits your wallet.

Many Government contractors pursuing a Cost plus Fixed Fee (CPFF) contract have lived through an Accounting System audit.  A CPFF contract is a cost reimbursable contract. One of the many contract types a contractor may be awarded. CPFF contracts put the onus on the government to prove out costs and there are more requirements and audits necessary than in being awarded a Firm Fixed Price (FFP) contract. Usually the only audit done on FFP contracts is on the proposal itself. Once a price is agreed to then the onus is on the contractor to stay at that price. If they priced it well then it’s good, if they didn’t do a thorough cost analysis for the proposal then that may hit the wallet too.

In actuality there are two types of Accounting System Audits; Pre-Award Accounting System audits (Audit # 17740: Preaward Survey of Prospective Contractor Accounting System) and Post Award Accounting System audits (Audit # 17741: Post Award Accounting System Audit at Non-major Contractors (Below 90M)). The audit packages can both be found at

Pre-Award audits are concerned with the design of the accounting system. The audit report header reads; ‘Independent Audit Report on XXXXX’s Preaward Accounting System Design’. This audit focuses on confirming that the questions found in SF 1408 are answered adequately. Standard Form (SF) 1408 is a list of questions that are required to be answered thoroughly, and correctly, in order to be deemed adequate.  This is usually accompanied by financial statements and records from the contractors accounting system to prove the segregation’s are in place, separating direct from indirect costs and grouping like administrative costs together.

The post award accounting system audit is performed at non-major contractors subsequent to contract award, to test compliance with DFARS 252.242-7006(c) which reads:

252.242-7006 (c) System criteria. The Contractor’s accounting system shall provide for –

(1) A sound internal control environment, accounting framework, and organizational structure;

(2) Proper segregation of direct costs from indirect costs;

(3) Identification and accumulation of direct costs by contract;

(4) A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives;

(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;

(8) Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices;

(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;

(11) Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account;

(12) 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;

(13) 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;

(14) Segregation of preproduction costs from production costs, as applicable;

(15) 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;

(16) Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms;

(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.

A Preaward accounting system also checks for many of these criteria. It’s the questions that are asked on the SF 1408 Preaward Accounting system survey. So why would anyone want to go through this?? First it may be required when being awarded a cost reimbursable contract. Second, and more importantly, an accounting system deemed adequate is a Golden Ticket!!

Try providing the accounting system audit report to a DCAA auditor and/or Procurement officer. You just gained 50 points in esteem and ethos. Granted, a Procurement Contracting officer (PCO) may not care about it if they don’t have to check that box, and they don’t for an FFP contract. However the smart PCO’s know that an adequate accounting system gives much more reliability for the administration of any contract.

Negotiated fixed price contracts do not require an adequate accounting system, only that the cost or pricing data submitted meets the cost or pricing data requirements. The accounting system should report certain financial data to support the cost or pricing data requirements such as indirect cost rate data. So basically in order to provide the cost or pricing required….the accounting system should be able to meet all of the requirements of an adequate accounting system. Go figure! The only place you have to prove it does though, is during an audit of the cost proposal.

DCAA now includes a question on the documentation it requests for the audit which states: ‘If an Outside CPA/Consultant/Non DoD agency has reviewed your Accounting System, please provide a copy of the Report.’

The existence of this statement gives credence to consultants, CPA’s and financial audit houses to now conduct accounting system audits. Previous to this audits were only done by DCAA at the request of the government, usually the PCO. The value of this process is priceless. The wisdom gained is well worth its weight in gold for this golden ticket. Consider the benefits of walking through this process. The difference between having an adequate system and not having one is par to getting awarded a contract or not getting the contract. Sooner or later your records must reflect an adequate accounting system in order to keep doing Government work well.

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