DCAA-compliant accounting system

A DCAA-compliant accounting system is one that satisfies the 18 criteria published in DFARS 252.242-7006. The criteria govern how a contractor accumulates, segregates, and reports costs on government contracts. Failing a pre-award survey — or receiving an "inadequate" finding during a contract — can delay billing, trigger demand letters for questioned costs, and affect future contract eligibility.

DCAA does not certify software. It evaluates systems as implemented at a specific contractor. Two contractors running the same software can produce opposite audit results depending on how the system is configured and used.

The 18 DFARS criteria — grouped by function

Cost segregation (criteria 1–4)

1. Segregation of direct costs from indirect costs
2. Identification and accumulation of direct costs by contract
3. Logical and consistent allocation of indirect costs to final cost objectives
4. Accumulation of costs under general ledger control

Timekeeping and labour (criteria 5–8) 5. Timekeeping system that identifies employees' labour by appropriate intermediate or final cost objectives 6. Labour distribution system that charges direct and indirect labour to the appropriate cost objectives 7. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account 8. Prohibition of costs charged to government contracts that are not allowable pursuant to FAR Part 31 or the contract

Indirect rates and billing (criteria 9–14) 9. Identification of costs by contract line item and units if required by the contract 10. Segregation of preproduction costs from production costs 11. Government contract accounting system information and processes that provide financial data for an interim (at least monthly) basis 12. Adequate, reliable data for use in pricing follow-on acquisitions 13. Reconciliation of cost data and the accounting records 14. Identification and accumulation of subcontract costs by contract

Audit trail and access (criteria 15–18) 15. An exclusion from the billing of costs that are not reimbursable under the terms of the contract 16. Identification of costs of independent research and development and bid and proposal costs separately from other indirect costs 17. Proper and timely recording of costs 18. Limitation on progress payment requests to amounts allowable

What "compliant" actually means in practice

Compliance is not a binary state. DCAA uses a four-point scale:

• Adequate: the system meets all 18 criteria as implemented
• Adequate with corrective action plan: minor deficiencies; contractor commits to remediation
• Inadequate for award: significant deficiencies that must be corrected before contract award (for pre-award surveys)
• Inadequate: findings during contract performance; may result in withheld payments

Most "inadequate" findings cluster around three areas: timekeeping controls, indirect cost pool definition, and unallowable cost identification. These are configuration issues as often as they are software capability gaps.

System configuration: where most findings originate

Timekeeping configuration The system must be configured so that:

• Employees cannot enter time for a period that is already closed without a documented exception
• Supervisors cannot modify employee time entries without an audit trail showing the change
• Time must be entered at least weekly (DCAA prefers daily)
• Every hour charged to a direct project must link to a specific contract and task

Systems that allow batch entry of weekly time at the end of the period, or that allow supervisors to enter time on behalf of employees, will generate findings regardless of the software's underlying capability.

Indirect cost pool setup The pools must match the disclosure statement (DS-1/DS-2 for CAS-covered contracts). Common misconfigurations:

• Overhead pool that includes costs that should be in G&A
• Fringe pool that includes non-benefit costs
• Allocation bases that are inconsistent with prior year submissions

Changes to pool structure mid-year require advance coordination with the ACO (Administrative Contracting Officer) and DCAA.

Unallowable cost identification FAR Part 31.205 lists specific unallowable costs: entertainment, alcoholic beverages, fines, lobbying, bad debts, and others. These must be:

• Identified in the chart of accounts as unallowable
• Excluded from indirect cost pool calculations
• Segregated in a separate cost objective

Many systems require manual account tagging. Purpose-built govcon ERP typically includes a pre-mapped unallowable cost list. Mid-market platforms require configuration.

Evaluation criteria when selecting a system

Criterion	What to ask the vendor
DFARS 252.242-7006 coverage	"Walk me through how your system addresses each of the 18 criteria"
Timekeeping lockout	"Show me what happens when an employee tries to enter time for a closed period"
Indirect rate automation	"How does the system calculate provisional rates and post burdened costs?"
Unallowable cost mapping	"Show me the unallowable cost account structure and how it excludes costs from pools"
ICS generation	"Can the system produce the Schedule H, I, and other ICS schedules natively?"
Audit trail	"Show me the audit trail for a modified transaction — who changed it, when, and what was changed"

ROI model: the cost of a finding vs. the cost of compliance

A conservative model for a $10M cost-reimbursable contract:

Item	Low estimate	High estimate
Questioned costs as % of contract (DCAA average for inadequate systems)	2%	8%
Questioned costs on $10M contract	$200,000	$800,000
Legal and accounting resolution cost	$50,000	$200,000
Billing suspension duration	30 days	90 days
Cash flow impact at $833K/month billing rate	$833,000	$2,500,000

Against this, a purpose-built govcon ERP implementation costs $150,000–$600,000 and reduces finding risk substantially. A properly configured mid-market ERP costs $80,000–$400,000 in implementation. Neither is cheap; both are cheaper than the alternative.

The above is a hypothetical illustration. Actual questioned-cost rates vary by contractor, contract type, and DCAA district. No specific engagement data is implied.

Ready to evaluate your options?

Government contracting accounting decisions carry long tails. A system that fails a DCAA pre-award survey can delay contract award by months; one that is configured incorrectly from day one creates audit findings on every subsequent year's incurred cost submission.

Book an assessment — a structured conversation with a practitioner who has been through DCAA audits, pre-award surveys, and incurred cost submissions on both sides of the table. No sales deck. No software demos unless you ask.

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Related guides

• Government Contractor Accounting Software
• Dcaa Certified Accounting System
• Dcaa Approved Accounting System
• Dcaa Compliant Software