Your Top 10 Questions About Accounting System Requirements & Reviews Answered

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April 7, 2015

Understanding Accounting System Requirements and DCAA Pre-Award Accounting System Reviews

Having an “adequate accounting system” is an integral part of successfully conducting business with the federal government. Many companies find it a challenge to determine which requirements apply to their specific contract. In preparation for an upcoming presentation on accounting system reviews, we’ve answered the ten most common questions we hear related to accounting system requirements and reviews.

1. Are small businesses required to have an adequate accounting system? The requirement for an adequate accounting system depends on the type of federal contract you will be/have been awarded. FAR 16.301(3) requires the contractor to maintain an adequate accounting system for determining costs applicable to the contract or order for contracts awarded on the basis of cost. This includes the following contract type:

  • Cost
  • Cost-sharing
  • Cost-plus-incentive-fee
  • Cost-plus-award-fee
  • Cost-plus-fixed-fee
  • Fixed Price
  • Time & Materials contracts with cost reimbursable line items
  • FPIF
  • FP of progress payments based on cost

2. Who is responsible for determining and monitoring adequacy of my accounting system for prime contracts? The Contracting Officer (CO) or Administrative Contracting Officer (ACO) is responsible for determining if the contractor has an adequate accounting system, if required by FAR 16.301. DCAA serves as the technical advisor in making this determination and is most often called in to perform a Pre-Award Accounting System Review or Post Award Review at the request of the ACO or CO.

3. What is the difference between the Pre-Award and Post Award Accounting System Review? The Pre-Award Accounting System review requires the contractor to demonstrate the capability to meet the requirements outlined in the Standard Form 1408, Pre-Award Survey of a Prospective Contractors Accounting System (SF 1408). The Post Award accounting system review not only requires the demonstration of the ability to meet the SF 1408 requirements but also includes detailed testing of transaction through the contractor’s accounting system to ensure the system is actually meeting the SF 1408 requirements.  Each have the ultimate objective of determining if the contractors accounting system is adequate to accumulate and bill cost on federal contracts.  Neither of the reviews in the current form meet the DFARS Business System Requirements under DFAR Clauses 252.242-7005 & 252.242-7006.

4. As a subcontractor am I required to have an adequate accounting system? The requirement is the same for a prime or a subcontract, it will ultimately depend on the type of subcontract you are awarded. The Prime contractor should “flow down” the requirement for an accounting system if awarding a subcontract based on cost.  Failure to do so may result in the subcontractor’s costs being disallowed in their incurred cost audit.

5. Who is responsible for monitoring the adequacy of my accounting system if I am a subcontractor? The prime contractor is responsible for managing its subcontracts, per FAR 42.202(e)(2). The prime contractor is responsible for subcontract award, technical and financial performance, monitoring, and payment to the subcontractor for the work accomplished under subcontract terms. The contractor’s internal control system over subcontracts and intercompany orders should provide for appropriate flow-down clauses that require:

  • Government or contractor access to the subcontractor’s books and records
  • Billings only include allowable costs
  • The subcontractor/intercompany entity to submit annual incurred cost proposal
  • Notification if there is any change in the status of the accounting system.

6. How can a contractor request DCAA review the organization’s accounting system?A Contractor cannot request that DCAA perform a service. Only a contracting officer or administrative contracting officer can make the request.  A contractor can engage in discussions with their ACO or an individual CO to request that they trigger a DCAA audit, but ultimately they will only trigger the audit if the CO determines there is a need.  DCAA resources are limited.  Technically the government only recognizes determinations made by the ACO (and most often the ACO makes the determination on a technical review by DCAA or another cognizant audit agency). The best advice I can give in order of priority by the government:

  • If the contractor has prime work, try to have the CO trigger a DCAA/ other cognizant audit agency to conduct a review.
  • If performing work only as a subcontractor, attempt to work through the prime contractors to trigger the review.
  • If the contractor has prime work and no system determination/review, they can attempt to claim that the government has already determined they are suitable for award by means of awarding previous contracts (which may work if the prior awards are cost or T&M).
  • Engage a third party to conduct a review.
  • Self-certify the system.

7. Can I have a third party review the system in lieu of DCAA or another cognizant audit agency to satisfy the requirement for an approved accounting system in a solicitation if I do not already meet the requirement. The federal government has not recognized third party reviews for the purpose of awarding prime contracts (there was one exception during GSA OASIS). Third party reviews do prepare contractors for an inevitable review by DCAA.  Third party reviews are also accepted by prime contractors as evidence of an acceptable accounting system for the purposes of awarding cost type subcontracts.

8. What if an RFP states an adequate accounting system as a requirement and DCAA has not yet reviewed my system, is the contractor limited from the competition? Technically the government should not limit competition due to the lack of a system review. However since FAR 16.301 requires an adequate accounting system for certain awards the requirement is included in many solicitations.  The selection committee typically triggers pre-award accounting system review on contractors that are down-selected.  There is also an option for a post award review however, since for small businesses contract default would be the remedy, most COs select the pre-award review.  It is important for the contractor to fully disclose the status of the system and ensure that the contractor is well prepared for a pre-award review upon submission of the proposal.

9. Does the contractor have access to the results of DCAA audits? The contracting officer that requested the audit will receive the results. In most cases the CO will make the report available to the contractor to enable either corrective actions or future use of the adequacy determination.  The CO may not release the report if an award is pending in which case the selection team typically does not release any data related to a source select.  The main point is to ask the CO if you can have a copy of the results and remember DCAA was engaged by the CO; therefore, DCAA provides the results to the CO.

10. How long is the adequacy determination valid? The system review is valid until there is a material change in the system. What would be considered a material versus immaterial change? A change in software is material.  Immaterial changes would include the addition of a new overhead pool for additional contract work or a minor revision to the policies and procedures.  The contractor should completely disclose all changes in the accounting system when submitting provisional billing rates and in the schedule M of their annual incurred cost submission to ensure compliance.

Please contact Nicole Mitchell at 301.222.8231 for questions or assistance related to federal government contracting.