DCAA-Compliant Accounting Systems

For a defense supplier, the business question is whether the company can demonstrate the required accounting capability before accepting work and keep that capability operating throughout performance. Begin with the proposed contract's pricing, financing, and clauses, then test the records behind them.

On This Page

• Determine which requirements apply
• Separate a preaward survey from system approval
• Connect each control to a usable record
• Keep indirect costs and billing explainable
• Find failures before they reach an invoice
• Prepare a demonstration your team can repeat

Determine which requirements apply

Cost-reimbursement work requires adequate cost accounting. Revised FAR 16.301-3 requires a system capable of separating, collecting, and allocating costs attributable to the contract or order during performance. Defense Class Deviation 2026-O0045 directs contracting officers to use the revised Part 16 beginning March 16, 2026. For a new defense procurement, reading only an older codified Part 16 reference can miss the governing acquisition instructions. Revised FAR Part 16; defense deviation memorandum.

The DFARS accounting-system clause has broader reach than cost-plus contracts. DFARS 242.7503 prescribes 252.242-7006 for contemplated cost-reimbursement, incentive, time-and-materials, or labor-hour contracts, and contracts with progress payments based on incurred costs or a percentage or stage of completion. A fixed-price label therefore does not settle the accounting question when the financing arrangement requires cost information.

Build a short applicability record for the actual opportunity: pricing type by line item, payment basis, incorporated accounting and audit clauses, reporting detail, and solicitation evidence requirements. For subcontract work, examine the terms the prime is imposing rather than assuming its own contract establishes your obligations.

Small-business status and CAS are separate questions

Cost Accounting Standards, or CAS, coverage is distinct from accounting-system adequacy. Contracts and subcontracts with small businesses are exempt under 48 CFR 9903.201-1(b)(3). That exemption does not remove the cost-accounting capability required for a cost-reimbursement contract or an applicable accounting-system clause.

Also distinguish the accounting clause from DFARS 252.242-7005, the Contractor Business Systems clause. Its prescription is tied to CAS-covered contracts and specified system clauses, subject to stated institutional exclusions. The associated payment-withholding mechanism should not be treated as a universal consequence for every small contractor. DFARS Subpart 242.70.

A CAS final rule published September 1, 2026 changes thresholds and other coverage provisions effective October 1, 2026. As of this article's September 8 check, that effective date is still ahead. Recheck coverage for awards around the transition instead of confusing future CAS relief with relief from contract accounting obligations. CAS Board final rule.

Separate a preaward survey from system approval

Standard Form 1408 is the government's preaward accounting-system survey. It asks whether the proposed system can support contract accounting, including cost segregation, job costing, labor charging, monthly posting, and exclusion of unallowable costs. It also distinguishes a system already operating from parts merely established, anticipated, or absent. A favorable design assessment should not be described as proof that every future transaction will be correct. SF 1408, revision January 2014.

DCAA's preaward adequacy checklist lets a contractor document how its design meets the survey criteria. Completing it is preparation for the review, not a self-issued approval. Use its questions to identify the actual policy, report, or system setting that answers each criterion.

DCAA performs these audits at a federal entity's request. A contractor cannot commission a DCAA audit directly. A consultant's readiness review does not substitute for the government's determination. DCAA guidance, pages 36–37.

For an operating system, distinguish the auditor's findings from the contracting officer's written determination. Under DFARS 242.7502, the officer considers the findings, determines acceptability, and pursues corrections. Keep the applicable report, determination, and unresolved corrective actions together so a proposal team does not overstate what was reviewed.

Connect each control to a usable record

The accounting system must do more than produce a company income statement. DFARS 252.242-7006(c) sets 18 criteria covering internal controls, contract costing, reconciliations, adjustments, management review, labor, monthly posting, allowability, billing, and applicable accounting practices. It also addresses contract-line and unit detail when required, separation of preproduction from production where applicable, funding information, and reliable data for follow-on pricing. Accounting System Administration clause.

The table translates those criteria and SF 1408 into a practical document request. The records and demonstration questions are editorial implementation suggestions, not a replacement checklist or a guarantee of approval.

Control area	Records to have ready	Demonstration question
Direct and indirect cost separation	Chart of accounts, charging policy, project codes	Can the same expense be traced to its contract or explained as shared support?
Contract and line-item costing	Job-cost ledger, contract setup, required line-item reports	Can the report reach the level of detail the contract requires?
Indirect allocation	Pool definitions, base calculations, allocation reports	Can another accountant reproduce the allocation from the books?
Labor charging	Time entries, approvals, correction history, payroll and labor-distribution reports	Does the charged work agree with the employee record and payroll allocation?
Ledger integrity	Monthly close, subsidiary-ledger reconciliations, approved adjustments	Can differences be identified and resolved without unexplained plug entries?
Billing and funding	Invoice support, cumulative billed-cost reconciliation, funding tracker	Can the reviewer explain what was billed, excluded, and limited?
Management oversight	Assigned responsibilities, review records, corrective-action follow-up	Is there evidence that people check whether the procedures work?

Source basis: DFARS 252.242-7006(c) and SF 1408, checked September 8, 2026. The table groups requirements; it does not reproduce every criterion.

For labor, DCAA's training guidance calls for daily employee time entries covering all hours worked, employee certification, supervisor approval, and reconciliation of labor distribution to payroll and cost ledgers. The guidance describes implementation expectations; the clause states the required capabilities. DCAA guidance, page 25.

For a small team, write down who creates charge codes, approves time, processes payroll, posts adjustments, and reviews the monthly close. If one person performs several tasks, identify the additional review that will catch a mistake. A policy nobody can execute during leave or staff turnover is a fragile operating arrangement.

Keep indirect costs and billing explainable

Indirect costs support more than one cost objective. A cost objective is the activity or contract for which costs are collected. The pool groups shared expenses; the allocation base measures how those expenses are distributed to benefiting work.

Under FAR 31.203, pools must be logical and allocation should reflect benefits. A contractor cannot switch similar costs between direct and indirect treatment in like circumstances to obtain a better reimbursement result. Nor should it strip proper elements from a base simply because their costs are unallowable.

For a simplified illustration, suppose a monthly support pool contains $20,000 of allowable expenses and its appropriate base is $100,000 of direct labor across all benefiting work, including commercial work. Assume one contract accounts for $15,000 of that base, and no other pools or contract limits affect the example.

Illustrative pool rate = $20,000 ÷ $100,000 = 20%.

Illustrative allocation to the contract = $15,000 × 20% = $3,000.

These assumed figures show the arithmetic, not a recommended overhead rate or an approved billing rate. Support both the numerator and denominator with accounting records, and explain why that base fits the pool.

Unallowable costs still need accounting records

Recording an expense does not establish government reimbursement eligibility. FAR 31.201-6 requires identification and exclusion of expressly unallowable or agreed-unallowable costs from applicable billings, claims, and proposals. It also addresses directly associated costs and their treatment. Preserve the transaction while separating its government-cost treatment; deleting it would destroy the explanation of what happened.

Use account codes or another controlled method to distinguish exclusion from a claimed pool from inclusion in a proper allocation base. An excluded expense may still need to bear its share of indirect costs under FAR 31.203. Treating every exclusion as a reduction to both pool and base can shift costs onto government work.

Booked costs, billed costs, and settled costs can differ

Where FAR 52.216-7 applies, reimbursement follows its payment conditions and contract terms. For example, its treatment of certain unpaid supplier costs depends on payment status and timing conditions. An accounts-payable entry alone does not answer whether the amount belongs in the current payment request. Allowable Cost and Payment clause.

Keep a reconciliation that explains differences among recorded, allowable, and billed costs, including rates and contract limits. Paragraph (d) also requires an adequate final indirect-cost-rate proposal within six months after fiscal-year end, unless the contracting officer grants the permitted written extension. Interim invoices therefore do not finish the accounting cycle. Maintain the supporting pool, base, contract-cost, payroll, and cumulative-billing schedules as part of normal operations.

Find failures before they reach an invoice

DCAA identifies missed monthly cost posting, mixed direct and indirect costs, improper timekeeping, and failure to exclude unallowable costs among recurring noncompliance areas. DCAA guidance, pages 34–35.

In practice, inspect the handoffs where the accounting explanation can break:

• Budget replaces actual work. Compare a labor charge with the employee's recorded activity, not just the hours remaining in a project budget.
• A correction loses its history. Retain the original charge, reason, authorizer, and resulting change so the adjustment can be understood later.
• An invoice is assembled separately from the ledger. Reconcile both the current request and cumulative billing; a correct-looking current month can conceal a prior mismatch.
• A policy describes the intended process. Ask for the most recent completed example and evidence of review. If none exists, distinguish a designed control from one already operating.

Apply these checks to a completed accounting period so the team has to resolve actual differences.

Corrective action and cash consequences

The current DFARS accounting-system rule uses material weakness terminology. Under DFARS 242.7502, the process includes a written initial determination and a 30-day contractor response, followed by a final determination. If weaknesses remain, the contractor is asked to correct them or submit an acceptable corrective-action plan within 45 days of receiving that final determination. Disapproval and withholding depend on the applicable rules and clauses; withholding under the business-systems mechanism requires 252.242-7005. DFARS 242.7502.

Assign each correction an owner and retain evidence that it worked. Installing a new timekeeping tool, for example, addresses little if employees still use the wrong charge codes or nobody reviews corrections.

Prepare a demonstration your team can repeat

Before an accounting-system review, select a completed period and trace a representative labor charge and supplier transaction from the original record through the ledger, allocation, and invoice. Then work backward from the billed amount. Include one corrected transaction and one excluded cost so the demonstration tests exceptions as well as routine processing.

Use the same exercise when evaluating software. Ask the team to show project detail, permissions, adjustment history, reconciliations, and exportable supporting records with a clearly labeled demonstration dataset. Judge the complete configuration and operating procedures. A feature list cannot show whether payroll, job costing, and billing actually agree.

Preserve access to those records when changing systems or service providers. The applicable contract clauses and FAR Subpart 4.7 govern retention, including record-specific periods and circumstances requiring longer retention. Build a schedule by record class and applicable clause rather than assuming every file has one universal deletion date.

The readiness decision should be concrete: identify the applicable requirements, produce the supporting records, explain every reconciliation difference, and correct the gaps the demonstration exposes. That gives management a basis for accepting cost-sensitive work and maintaining the system after the review ends.

Source notes

• DCAA Accounting System Requirements: Agency training guidance on software versus systems, audit requests, labor controls, and recurring noncompliance.
• DFARS 242.7502: Contracting-officer approval, material-weakness determinations, corrective action, and conditional withholding.
• Revised FAR Part 16: Section 16.301-3 requires contract-specific cost-accounting capability for cost reimbursement.
• Defense Class Deviation 2026-O0045: Directs use of revised FAR Part 16 beginning March 16, 2026.
• DFARS 242.7503: Prescription for the accounting-system clause across pricing and progress-payment arrangements.
• 48 CFR Part 9903: Section 9903.201-1(b)(3) exempts contracts and subcontracts with small businesses from CAS.
• DFARS Subpart 242.70: CAS-covered-contract definition and prescription for the business-systems clause.
• CAS Board final rule, September 1, 2026: CAS coverage amendments take effect October 1, 2026.
• SF 1408, revision January 2014: Preaward accounting-system evaluation criteria and distinction between operating and proposed capabilities.
• DCAA preaward adequacy checklist: Contractor documentation of system design against SF 1408 for the preaward survey.
• DFARS 252.242-7006: Accounting-system definition and 18 system criteria in paragraph (c).
• FAR 31.203: Logical indirect pools, benefit-based allocation, consistent treatment, and proper allocation-base contents.
• FAR 31.201-6: Identification and exclusion of unallowable and directly associated costs.
• FAR 52.216-7: Reimbursement conditions, final indirect-rate proposals, six-month deadline, and supporting schedules.
• FAR Subpart 4.7: Contractor-record retention, record-specific periods, and longer-retention circumstances.

Last checked: September 8, 2026.