Has your prime or contracting officer told you that you need an approved or adequate accounting system before your next award? What exactly is an approved or adequate accounting system?
In the world of government contracting, most people think of DCAA-approved accounting systems. There are a few misnomers in that statement:
- DCAA does not approve accounting systems. They audit or review systems and provide recommendations to the contracting officer who holds the responsibility and authority for approving a system. DFARS 242.7502(b)
- DCAA can no longer (at least temporarily) perform audit services for non-defense agencies. Sec. 893 of the National Defense Authorization Act of 2016 prohibits the DCAA from providing outside audit support to non-DOD agencies until the DCAA certifies that the backlog for incurred cost audits is less than 18 months of incurred cost inventory.
- DCAA is not the only organization that can perform accounting system reviews. See the DFARS clause above and item #3 on DCAA’s SF1408 Checklist.
There are other misnomers regarding the requirement of an adequate or approved system. FAR 16.301-3 states that an “adequate” system is required for cost-reimbursement contracts while DFARS 242.7502(a) implies that an “approved” system is required for cost-reimbursement, incentive-type, time-and-materials, and labor-hour contracts. Note the distinction that the FAR does not indicate incentive-type, time-and-materials, and labor-hour contracts and neither clause mentions fixed-price contracts. Approved systems are also not required for the acquisition of commercial items or actions below the simplified acquisition threshold.
While the FAR does not define an “adequate” or “approved” system, two common sources of guidelines are the SF1408 Preaward Survey of Prospective Contractor Accounting System and the Accounting System Administration criteria in DFARS 252.242-7006(c). Additional guidance can be found in the 18 Cost Accounting Standards. The basic criteria include:
- Transactions under general ledger control, in accordance with GAAP
- Segregation of direct and indirect costs
- Identification of all costs, particular time (labor), by end cost objective, contract, and/or line item
- Logical collection and allocation of indirect costs
- Identification and segregation of unallowable costs
How can you get an accounting system review? You have three primary options:
- Have prime’s audit team review your system
- Hire an outside firm
You probably realize some of the issues with those options. Self-certifying, if the contracting officer allows, add another layer of compliance risk in your federal contract. Most subcontractors view their primes as competitors and don’t want them nosing around their books. And there’s no guarantee that a contracting officer will accept your letter from an outside firm. That said, most contracting officers acknowledge the obstacles to system approval and recognize the role that outside firms play.
Are you looking for accounting system review or guidance in designing your system? We can help! Call today.