What an acceptable accounting system means before a first DCAA review.

When this applies

The clause applies when it is in the contract, and DFARS 242.7503 says it is used for cost-reimbursement, incentive-type, time-and-materials, and labor-hour contracts, and for contracts with progress payments made on costs incurred or on a percentage or stage of completion. ⁴ DFARS 252.242-7006 says the contractor shall establish and maintain an acceptable accounting system. Failure to maintain one shall result in withholding of payments if the contract also includes DFARS 252.242-7005, Contractor Business Systems, and may also result in disapproval of the system. ³

FAR 42.101 says that for contractors other than educational institutions and nonprofit organizations, the Defense Contract Audit Agency (DCAA) is normally the responsible Government audit agency. Another agency can take cognizance if the two agencies agree. ¹⁰

DCAA's own site says the agency provides audit and financial advisory services to the War Department and other federal entities responsible for acquisition and contract administration. Its primary function is to conduct contract audits and related financial advisory services. Contract audits are independent reviews of financial representations made by defense contractors, and DCAA helps determine whether contract costs are allowable, allocable, and reasonable. DCAA operates under the authority, direction, and control of the Under Secretary of Defense (Comptroller). ¹¹

A pre-award survey is earlier than an incurred-cost audit. GSA publishes the survey as the Pre-Award Survey of Prospective Contractor (Accounting System). The PDF is labeled Standard Form 1408 (Rev. 1/2014), prescribed by GSA FAR 53.209-1(f). The form's own paperwork statement estimates 24 hours to read the instructions, gather the facts, and answer the questions. ^{2, 1}

What SF 1408 asks

Section I of the form records whether the accounting system is acceptable for award of the prospective contract: yes, no, or yes with a recommendation that a follow-on review be performed after award. Section II is the checklist. ¹

The checklist asks whether, except as stated in the narrative, the system is in accord with generally accepted accounting principles applicable in the circumstances. It then asks whether the system provides for all of the following. ¹

• Proper segregation of direct costs from indirect costs.
• Identification and accumulation of direct costs by contract.
• A logical and consistent method for allocating indirect costs to intermediate and final cost objectives. The form notes that a contract is a final cost objective.
• Accumulation of costs under general ledger control.
• A timekeeping system that identifies employees' labor by intermediate or final cost objectives.
• A labor distribution system that charges direct and indirect labor to the appropriate cost objectives.
• Interim, at least monthly, determination of costs charged to a contract through routine posting of the books of account.
• Exclusion from costs charged to government contracts of amounts that are not allowable under FAR 31, Contract Cost Principles and Procedures, or other contract provisions.
• Identification of costs by contract line item and by units, as if each unit or line item were a separate contract, if the proposed contract requires it.
• Segregation of preproduction costs from production costs.

The form also asks whether the system produces the financial information required by the limitation-of-cost clauses (FAR 52.232-20 and 52.232-21) or the limitation-on-payments clause (FAR 52.216-16), and the information required to support progress-payment requests. It asks whether the system is designed, and the records kept, so that adequate, reliable data are developed for pricing follow-on acquisitions. It asks whether the system is currently in full operation. If it is not, the narrative has to say which portions are in operation, set up but not operating, anticipated, or nonexistent. ¹

What the DFARS clause adds

DFARS 252.242-7006 (Jan 2025) uses the same core list and adds items the 2014 form does not print as separate lines. The clause requires a sound internal control environment, accounting framework, and organizational structure. It requires reconciliation of subsidiary cost ledgers and cost objectives to the general ledger, approval and documentation of adjusting entries, and management reviews or internal audits of the system. It requires billings that can be reconciled to the cost accounts for both current and cumulative amounts and that comply with contract terms. It requires accounting practices in accordance with Cost Accounting Standards Board standards, if applicable, otherwise generally accepted accounting principles. ³

The clause also says the system must be able to produce the cost information required by FAR 52.232-20, FAR 52.232-22, and FAR 52.216-7, and to calculate indirect cost rates readily from the books of account. ³

If the contracting officer finds a material weakness, the clause sets a written process: an initial determination, 30 days for the contractor to respond, a final determination, and then 45 days either to correct the weakness or to submit an acceptable corrective action plan. ³

Timekeeping

Both the form and the clause treat timekeeping as part of the accounting system. Labor has to be identified by intermediate or final cost objective, and a labor distribution system has to charge direct and indirect labor to the right objectives. ^{1, 3}

A timesheet that only records total hours for the week, with no contract or indirect account, does not meet that sentence. The clause does not name a brand of software.

Unallowable costs

FAR 31.201-2 says a cost is allowable only when it meets all of these tests: reasonableness, allocability, Cost Accounting Standards if applicable (otherwise generally accepted accounting principles and practices appropriate to the circumstances), the terms of the contract, and any limitations in FAR subpart 31.2. ⁵

FAR 31.201-6 says costs that are expressly unallowable, or mutually agreed to be unallowable, including directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract. ⁶

FAR 31.205 is the selected-costs section. It is a list of topics, including public relations and advertising, bad debts, compensation, contributions or donations, depreciation, and others. Whether a particular dollar is unallowable depends on the subsection that covers it and on the contract. ⁸

The accounting system has to be able to keep those amounts out of costs charged to government contracts. That is checklist item 2.h on SF 1408 and criterion (c)(12) of the DFARS clause. ^{1, 3}

Indirect rates

After direct costs have been charged to a contract or other work, FAR 31.203 says indirect costs are those remaining to be allocated to intermediate or two or more final cost objectives. A final cost objective cannot receive, as an indirect cost, a cost that was treated as a direct cost of that or any other final cost objective in like circumstances. The contractor accumulates indirect costs by logical cost groupings. ⁷

The DFARS clause wants a logical and consistent method for accumulating and allocating those costs, and books that can produce the rates. ³

Incurred cost

FAR 52.216-7, Allowable Cost and Payment, is the clause that pays allowable incurred cost on a cost-reimbursement contract. Paragraph (d) says final annual indirect cost rates and the appropriate bases are established under FAR subpart 42.7. The contractor shall submit an adequate final indirect cost rate proposal to the contracting officer (or cognizant federal agency official) and to the auditor within the six-month period following the end of each fiscal year. A reasonable extension, for exceptional circumstances only, has to be requested in writing and granted in writing. The contractor shall support the proposal. ⁹

That submission is what people mean by an incurred cost submission. The clause applies when it is in the contract. FAR 16.307 is the prescription cited on the clause page. ⁹

How to prepare

Read the solicitation for SF 1408, DFARS 252.242-7006, and FAR 52.216-7 before you buy a system. The clauses apply when they are in the contract. ^{3, 9}

If they are, the practical test is whether a reviewer can tick the SF 1408 lines from your books: direct versus indirect, cost by contract, a written indirect-rate method, time by cost objective, labor distribution, monthly posting, unallowable cost identified and left out of billings, and a general ledger that ties to the job cost ledgers. The DFARS clause also expects reconciliations, documented adjusting entries, and billings that trace to the cost accounts. ^{1, 3}

DCAA describes its contract audits as independent reviews of financial representations made by defense contractors. A vendor's sentence about its own product is the vendor's sentence. ¹¹

Sources checked October 16, 2026. Not legal advice.