A pre-award accounting system audit is an evaluation of the design of your accounting system for the award of cost-type contracts, including Cost-plus-fixed-fee and Time & Materials (T&M). An adequate accounting system is required pursuant to FAR 16.104:
(i) Adequacy of the contractor's accounting system. Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type.
What is SF 1408?
DCAA, and prime contractors alike, us the Standard Form SF-1408 to evaluate if a contractor’s accounting system is adequate for the award of these types of contracts. Without an adequate accounting system that passes the criteria in the SF-1408, a contractor will not be able to compliantly perform under cost-type contracts so it’s critical that a contractor understand the criteria, and how to demonstrate compliance with the criteria.
The Standard Form 1408 (SF1408), otherwise known as the Pre-Award Accounting System Survey, or Pre-Award Accounting System Adequacy Checklist, is a checklist used by Defense Contract Audit Agency (DCAA) auditors in the performance of a “pre-award audit”. The “pre-award audit” is technically a review and not a true audit because it does not look at any actual costs, rather it determines whether the design of a contractor’s accounting system is “adequate”
The SF1408 is usually a self-certification that documents the contractor’s accounting system adequacy and is used by DCAA during its Accounting S
ystem Review, but in some cases, it can be utilized by a third-party CPA to issue a determination of acceptability. It should be noted, however, that acceptance of a third-party CPA’s determination by the Federal customer is usually stated explicitly within the solicitation.
The SF1408 criteria requires that a contractor be able to demonstrate the following:
- Proper segregation of direct costs from indirect costs; Identification and accumulation of direct costs by contract;
- A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives;
- 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 to books of account;
- Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR part 31 or other contract provisions;
- Identification of costs by contract line item (CLIN) and by units (as if each line item or unit was a separate contract) if required by the proposed contract; and
- Segregation of preproduction costs from production costs (manufacturing only).
What if a Contractor Does Not Meet the SF1408 Criteria?
If a contractor cannot demonstrate it maintains an “adequate accounting system”, it may be denied the award or required to correct the deficient elements prior to reconsideration. If a contractor has been awarded a Federal contract and cannot pass an Accounting System Audit, DCAA can suspend the contract until the deficiencies are resolved.
As such, it is always in a contractor’s best interest to proactively conduct and submit an SF1408 if it plans to bid on a cost-reimbursable award, or show proof of a previous determination of an “acceptable accounting system”. If gaps within the accounting system have been identified during the process, the contractor should include a detailed plan with implementation date for bringing its system into compliance.
What is the Difference Between a Pre-Award Accounting System Audit and a Post Award Accounting System Audit?
A lot! A pre-award accounting system audit evaluates the design of the accounting system, namely that it can collect costs at the project level and has sufficient cost accounting set-up with policies to demonstrate it is capable of properly invoicing under cost-type awards. A post award accounting system audit tests the operating effectiveness of the system, specifically evaluating transactions that run through the accounting system. They are entirely different audit programs:
Pre-Award Accounting System Audit Program: 17740 Preaward Survey of Prospective Contractor Accounting System AP (dcaa.mil)
Post-Award Accounting System Audit Program: 11070 Compliance with DFARS 252.242-7006 Accounting System Administration Requirements Audit AP (dcaa.mil)
Navigating a DCAA audit can be a complex and challenging process, and ensuring that your accounting system is audit-ready is crucial for success. Whether you're seeking assistance with supporting an ongoing DCAA audit or evaluating the preparedness of your accounting system for an upcoming audit, our expert team is here to guide you. We specialize in providing comprehensive support, from assessing compliance with DCAA requirements to implementing necessary adjustments in your accounting practices.