Accounting System Requirements for Government Contractors

Standard Form 1408 is the government's questionnaire used to evaluate whether your accounting system is adequate for government contract costing. When you bid on a cost-type or T&M contract above the simplified acquisition threshold, the contracting officer will typically request a pre-award survey that includes the SF 1408. DCAA then reviews your responses and may conduct an on-site audit.

The SF 1408 asks 20 detailed questions about your accounting system's capabilities, covering topics from segregation of direct and indirect costs to timekeeping practices, from accumulation of costs by contract to exclusion of unallowable costs per FAR Part 31. Each question must be answered “yes” or “no,” and “no” answers require explanation.

A finding of “inadequate” does not necessarily kill your pursuit, but it significantly weakens your position. The contracting officer may still award if you provide a corrective action plan and a timeline for remediation. However, in a competitive evaluation, an inadequate accounting system finding is a serious risk factor that evaluators will weigh against you. The best strategy is to have your system audit-ready before you ever submit a proposal for a cost-type contract.

DFARS 252.242-7006 defines the criteria for an adequate accounting system. Your system must be able to perform all of the following functions to be considered adequate for government contract costing:

Timekeeping is the most audited area of government contractor accounting. DCAA considers timekeeping the foundation of labor cost integrity, and deficiencies in timekeeping practices are the most common finding in accounting system audits. Your timekeeping system must meet specific standards that go well beyond what a typical commercial employer requires.

Daily recording: Employees must record their time daily, not weekly or at the end of the pay period. Time entries should reflect actual hours worked on each charge number each day. Reconstructing timesheets from memory at the end of the week is a DCAA red flag that can result in questioned costs.

Supervisor approval: All timesheets must be reviewed and approved by a supervisor with knowledge of the employee's work assignments. The supervisor must be able to verify that the hours charged are reasonable and consistent with the employee's actual work activities. Rubber-stamping without review is a compliance violation.

Corrections and adjustments: Time corrections must be documented with the original entry preserved, the correction noted, the reason for the change recorded, and both employee and supervisor approval obtained. Patterns of time corrections — especially transfers between contracts — will trigger DCAA scrutiny. Your timekeeping policy should be documented in writing and acknowledged by every employee annually.

Job cost accounting is the practice of tracking all costs associated with a specific contract or project. In government contracting, every dollar charged to a contract must be traceable to the contract that benefits from the cost. This is fundamentally different from commercial accounting where overhead can be allocated broadly without contract-level precision.

Direct costs are those that can be identified specifically with a particular contract: labor hours worked on the project, materials purchased for the project, subcontractor costs, travel directly related to contract performance, and equipment dedicated to the contract. These are charged directly to the contract charge number.

Indirect costs benefit multiple contracts or the company as a whole and cannot be charged directly. These are accumulated in cost pools (fringe benefits, overhead, general and administrative) and allocated to contracts through indirect rates. The allocation base must be logical and consistently applied. Common bases include direct labor dollars, direct labor hours, or total cost input depending on the pool.

The interplay between direct and indirect costs creates the “wrap rate” — the total cost of an employee hour including all indirect burdens. Understanding your wrap rate is essential for pricing government contracts accurately. A direct labor rate of $50/hour may produce a fully burdened rate of $120-$150/hour once fringe, overhead, and G&A are applied.

A floor check is an unannounced DCAA visit where auditors walk through your facility and interview employees about their work assignments and time charging practices. The auditor will ask employees what they are working on, what charge number they are using, and then compare the answers to the timesheets submitted for that day.

Discrepancies between what employees say they are doing and what their timesheets show are the most damaging findings in a floor check. To prepare, ensure every employee understands their charge numbers, knows which contract they are currently supporting, and records time accurately and daily. Regular internal “practice floor checks” help identify issues before DCAA arrives.

Floor checks may also examine physical access controls (who can modify timesheets), segregation of duties (the person entering time should not be the person approving it), and whether your documented timekeeping procedures match actual practice. Keep your timekeeping policy manual accessible and current. DCAA expects every employee to have been trained on timekeeping requirements and for that training to be documented.