An Adequate Accounting System — The SF 1408 Gate on Cost-Type Work
Also known as: DCAA-compliant accounting system, preaward accounting system survey, SF 1408 audit
What you do here: Build a system that segregates direct from indirect costs and passes a preaward survey before you bid cost-type work
At a Glance
- Who it applies to
- Any contractor pursuing a cost-reimbursement contract; often reviewed for T&M and other flexibly priced work as well
- What it obligates
- An accounting system that can segregate, accumulate, and report costs by contract — demonstrated on the SF 1408 criteria
- Governing authority
- FAR 16.301-3(a)(1) (cost-reimbursement limitation), FAR 9.106 (preaward surveys), SF 1408 (survey form)
- Who evaluates it
- The cognizant auditor (DCAA for DoD, or another agency's audit organization) at the contracting officer's request
- The stakes
- No adequate system, no cost-type award — regardless of how strong the technical proposal is
What It Is
FAR 16.301-3 states the rule plainly: a cost-reimbursement contract may be used only when, among other conditions, the contractor's accounting system is adequate for determining costs applicable to the contract. That single sentence is the gate a growing SDVOSB has to walk through to move beyond fixed-price work, and it is evaluated before award, not after. The mechanism is a preaward survey under FAR 9.106, in which the contracting officer asks the cognizant audit organization to examine the prospective contractor's accounting system; the examination is structured around Standard Form 1408, Preaward Survey of Prospective Contractor — Accounting System. The SF 1408 criteria are the operational definition of 'adequate,' and they are worth reading as a design specification rather than a test: the system must be in accord with generally accepted accounting principles; it must provide proper segregation of direct costs from indirect costs; it must identify and accumulate direct costs by contract; it must have a logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives; it must accumulate costs under general ledger control; it must include a timekeeping system that identifies employees' labor by intermediate and final cost objectives and a labor distribution system that charges direct and indirect labor to the appropriate objectives; it must determine costs by interim (at least monthly) determination through routine posting of books of account; it must exclude costs that are unallowable under FAR Part 31 or other contract provisions; it must identify costs by contract line item and by units if required; and it must segregate preproduction costs from production costs. Note the phrasing on the form itself: the survey asks whether the system is acceptable for award of a prospective contract and whether it is *designed* to accumulate costs appropriately — a firm that has never performed a cost-type contract can pass on design, so long as the system genuinely exists and works.
When It Applies
- Before award of any cost-reimbursement contract, as a condition of the responsibility determination.
- When a solicitation states that an adequate accounting system is required, or asks you to represent whether one has been audited.
- Frequently on time-and-materials and labor-hour work, where material and other direct costs are reimbursed at cost.
- When a prime contractor evaluates you as a cost-type subcontractor and flows the requirement down.
- When you propose on work with an award-fee, incentive, or cost-sharing structure that depends on measured costs.
Key Features
| Feature | What It Means |
|---|---|
| It is a precondition, not a formality | FAR 16.301-3 makes an adequate accounting system a condition of using a cost-reimbursement contract at all — the CO cannot simply waive it. |
| SF 1408 is the checklist | The form's criteria — segregation, job-cost accumulation, indirect allocation, general ledger control, timekeeping, unallowable exclusion — define what 'adequate' means. |
| Design can be enough preaward | The survey asks whether the system is designed to accumulate and segregate costs appropriately; a firm without cost-type history can pass on a demonstrated, operating design. |
| Monthly is the minimum cadence | The criteria require interim determination of costs at least monthly through routine posting of the books — quarterly bookkeeping fails. |
| Timekeeping is inside the definition | A labor system that identifies employees' time by cost objective is an accounting-system criterion, not a separate nicety. |
| 'DCAA-approved' is a misnomer | DCAA audits and reports; the contracting officer determines adequacy. No vendor can sell you a system that is inherently 'DCAA-approved.' |
The SDVOSB Angle
This requirement is the most common hard ceiling on an SDVOSB's growth, and it is entirely surmountable with lead time. The failure pattern is a firm that has done well on firm-fixed-price work, identifies an attractive cost-plus or T&M opportunity, and discovers three weeks before the proposal is due that its bookkeeping — a commercial general ledger with no job costing, no indirect pool structure, and no timekeeping discipline — cannot pass an SF 1408 survey. The system can't be retrofitted that fast, because part of what the survey looks for is that the system is actually operating and posting monthly. The right sequence is to build the capability a year before you need it: adopt a general ledger structure that supports job costing and segregates direct from indirect costs, stand up a fringe/overhead/G&A pool structure, implement daily timekeeping, add unallowable-cost accounts, and close the books monthly. That work costs a fraction of what an SDVOSB typically spends on a single major proposal, and it is durable — it also improves your fixed-price pricing, gives you defensible rates, and supports the incurred cost submission later. Two clarifications small firms should hold onto. You do not need cost-type past performance to pass; the survey evaluates the system's design and operation. And you should not accept a claim that a particular accounting package is 'DCAA-approved' — DCAA does not certify software. What is evaluated is your system: the software plus your chart of accounts, your policies, your timekeeping practice, and your monthly close.
How to Comply
- Adopt a general ledger and job-cost structure that segregates direct costs from indirect costs and accumulates direct costs by contract.
- Establish your indirect pools and allocation bases in writing, with a documented, consistent allocation method.
- Implement a timekeeping system that records all hours by cost objective, daily, with employee entry and supervisor approval.
- Create dedicated unallowable-cost accounts so FAR Part 31 unallowables are excluded from billings and pools automatically.
- Close your books monthly so costs are determined by routine posting at least each accounting period.
- Write the supporting policies — cost accounting, timekeeping, unallowable costs, billing — because the survey asks about practice, not just software.
- Do a self-assessment against every SF 1408 criterion, and fix gaps well before a proposal is due.
Watch Out For
- Waiting until a cost-type opportunity appears; a system cannot be credibly stood up in the weeks before a proposal is due.
- Buying software marketed as 'DCAA-approved' and assuming the requirement is met — the survey evaluates your whole system and practice.
- Closing the books quarterly or annually, which fails the interim-determination criterion outright.
- Treating timekeeping as an HR matter; it is an explicit accounting-system criterion and the most commonly failed one.
- Having pools and bases that exist only in a spreadsheet outside the general ledger, breaking the general-ledger-control criterion.
- Assuming an adequate system is permanent — post-award reviews can find a system inadequate later, with billing consequences.
Run the Numbers
Frequently Asked
Do I need a DCAA-approved accounting system to win a cost-plus contract?
You need an accounting system the contracting officer determines is adequate for determining costs applicable to the contract, which FAR 16.301-3 makes a condition of using a cost-reimbursement contract. In practice that determination usually rests on a preaward survey performed by the cognizant audit organization — DCAA for Department of Defense work — using the criteria on Standard Form 1408. 'DCAA-approved' is loose shorthand: DCAA audits and reports its findings, but the contracting officer makes the adequacy determination, and no accounting software is inherently approved.
What does the SF 1408 actually test?
Standard Form 1408, Preaward Survey of Prospective Contractor — Accounting System, tests whether the system is in accord with generally accepted accounting principles and whether it provides: proper segregation of direct costs from indirect costs; identification and accumulation of direct costs by contract; a logical and consistent method for accumulating and allocating indirect costs to cost objectives; accumulation of costs under general ledger control; a timekeeping system identifying employees' labor by cost objective and a labor distribution system; interim determination of costs at least monthly through routine posting of the books; exclusion of costs unallowable under FAR Part 31 or other contract provisions; identification of costs by contract line item and units where required; and segregation of preproduction from production costs.
Can a company with no cost-type contract history pass an accounting system survey?
Yes. The preaward survey evaluates whether the accounting system is acceptable for award and is designed to accumulate and segregate costs appropriately — it does not require a track record of performing cost-reimbursement contracts. What it does require is that the system genuinely exists and operates: a real chart of accounts with direct/indirect segregation, an established indirect pool and base structure, working timekeeping, unallowable-cost segregation, and a monthly close. A design that exists only on paper, or a system that has never been run, will not pass.
How long does it take to build an adequate accounting system?
Plan on months, not weeks. The structural pieces — a job-cost-capable general ledger, a documented pool and base structure, written cost accounting and timekeeping policies, unallowable-cost accounts — can be configured relatively quickly, but the survey looks for a system that is operating, with costs determined by routine monthly posting. That means you need several closed accounting periods of real data before the system can be demonstrated. The practical implication for a small business is to build the capability well before the cost-type opportunity you want, not in response to it.
Primary Sources
- FAR 16.301-3 — Limitations (cost-reimbursement contracts)
- FAR 9.106 — Preaward surveys
- FAR 53.209-1 — Contractor qualifications and standards (SF 1408)
- FAR Subpart 9.1 — Responsible Prospective Contractors
Plain-English reference, not legal, accounting, or tax advice. Cost allowability and accounting determinations are fact-specific, and the FAR, the Cost Accounting Standards, and the statutory dollar thresholds quoted here are amended and escalated for inflation over time. Always read the current FAR text and the cost and payment clauses in your specific contract, confirm the applicable thresholds and your accounting treatment with the contracting officer or cognizant administrative contracting officer, and consult a qualified government-contract accountant or counsel before relying on a cost position, signing a certificate, or submitting a claim.
Change log (1)
- LaunchedPublished the federal cost principles, indirect rates & government accounting requirements reference covering how the government decides what an SDVOSB may charge it — the five allowability tests of FAR 31.201-2, reasonableness and allocability (FAR 31.201-3 / 31.201-4), the expressly unallowable costs of FAR 31.205 with directly associated costs (FAR 31.201-6) and the FAR 42.709 / 52.242-3 penalty, the direct-vs-indirect consistency rule (FAR 31.202 / 31.203), the fringe/overhead/G&A pool-and-base structure behind a wrap rate, provisional billing rates (FAR 42.704), the incurred cost submission and final indirect rate settlement (FAR 52.216-7(d) / 42.705 / 42.708 quick closeout), the adequate accounting system tested on the SF 1408 (FAR 16.301-3 / 9.106), timekeeping and labor charging with floor checks and total time accounting, DCAA audits versus DCMA administrative contracting officer determinations, certified cost or pricing data and defective pricing (FAR 15.403-1 / 15.403-4 / 15.406-2 / 52.215-10), and the Cost Accounting Standards with the small-business exemption at 48 CFR 9903.201-1 — each with an at-a-glance quick-facts card, a when-it-applies list, a key-features table, an SDVOSB-specific angle, a how-to-comply checklist, watch-outs, FAQPage, Article, Dataset, and BreadcrumbList structured data, primary-source FAR / U.S.C. / CFR citations, and cross-links into the glossary, contract types, payment methods, thresholds, clauses, forms (SF 1408), regulation explainers, contracting roles, how-to guides, FAQ, and the price-to-win, size-standard, win-probability, and limitations-on-subcontracting calculators.