When a Small Business contracts with the Department of Defense, NASA, or the Department of Homeland Security (and potentially other agencies), they are often required to have a DCAA compliant accounting system. While there are many components of a compliant system (just as there many types of DCAA audits), the underlying procedure for assessing a contractor’s system is guided by the Standard Form (SF) 1408 (also known as the “Preaward Survey of Prospective Contractor Accounting System”), seen here below:
So, what does each requirement mean for your accounting system? Let's take a step by step look at each of the SF1408's requirements:
IMPORTANT NOTE: THE ENTIRE ACCOUNTING SYSTEM MUST BE CONTROLLED BY WRITTEN POLICIES AND PROCEDURES TO BE COMPLIANT. MOST, IF NOT ALL, OF THE REQUIREMENTS IN THE SF 1408 WILL NEED TO BE DOCUMENTED IN YOUR SPECIFIC POLICIES AND PROCEDURES.
Section 1 –“EXCEPT AS STATED IN SECTION I NARRATIVE, IS THE ACCOUNTING SYSTEM IN ACCORD WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES APPLICABLE IN THE CIRCUMSTANCES?”
Section 2 (a) – “(ACCOUNTING SYSTEM PROVIDES FOR): Proper segregation of direct costs from indirect costs.”
The accounting system must have separate accounts for each cost element in significant detail for audit. The direct costs must be collected and separated from indirect costs in the accounting system. The system should provide for invoicing direct costs to the government and properly allocating indirect costs for invoicing to the government (see 2(c)).
Section 2 (b) – “Identification and accumulation of direct costs by contract.”
Section 2 (c) – “A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives (contracts).”
Section 2 (d) – “Accumulation of costs under general ledger control.”
Section 2 (e) – “A timekeeping system that identifies employees' labor by intermediate or final cost objectives.”
Section 2 (f) - A labor distribution system that charges direct and indirect labor to the appropriate cost objectives.
Section 2 (g) - Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account.
Section 2 (h) - Exclusion from costs charged to government contracts of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions.
Section 2 (i) - 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 proposed contract.
Section 2 (j) - Segregation of pre-production costs from production costs.
Contractors must demonstrate the ability to account for/capture pre-contract costs separately. Pre-contract contract costs are any costs incurred before the effective date of a contract that were required to be incurred to meet schedule for some other contract requirement. In most cases, to be considered allowable, the cost must be subject to an advanced agreement with the government.
Section 3 (a) – “(ACCOUNTING SYSTEM PROVIDES FINANCIAL INFORMATION): Required by contract clauses concerning limitation of cost (FAR 52.232-20 and 21) or limitation on payments (FAR 52.216-16).”
Section 3 (b) - Required to support requests for progress payments.
Section 4 - IS THE ACCOUNTING SYSTEM DESIGNED, AND ARE THE RECORDS MAINTAINED IN SUCH A MANNER THAT ADEQUATE, RELIABLE DATA ARE DEVELOPED FOR USE IN PRICING FOLLOW-ON ACQUISITIONS?
Section 5 - IS THE ACCOUNTING SYSTEM CURRENTLY IN FULL OPERATION? (If not, describe in Section I Narrative which portions are (1) in operation, (2) set up, but not yet in operation, (3) anticipated, or (4) nonexistent.)
A nonexistent system will receive an unfavorable rating. By engaging ReliAscent at any time up to the day before the audit, you will join others who have passed their pre-award surveys.
Once your accounting system is brought into compliance, our team can then operate that system for you, on an outsourced, monthly basis, to ensure you maintain DCAA compliance, and do not run afoul of the Federal Government.
To learn more about our Government Contract Accounting, Business and Financial Consulting, and Contract & Grant Management Services for Small Business Federal Contractors and Grantees, contact ReliAscent today. Our team has a combined 200+ years of DCAA compliance and contract management experience, and is entirely unique in the Government Accounting Industry.
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