Form SF 1408 Pre‑Award Accounting System Audit: What Government Contractors Need to Know
Winning your first cost‑type government contract is a major milestone, but before that award is made, many contractors must clear an important hurdle: the Pre‑Award Accounting System Audit. This audit helps the Government determine whether a contractor’s accounting system is capable of properly handling federal funds under cost‑reimbursement and similar contract types.
For small businesses in particular, understanding what this audit is (and what it is not) can significantly reduce risk, rework, and delays during contract award.
What Is a Pre‑Award Accounting System Audit?
A Pre‑Award Accounting System Audit is an evaluation performed by the Defense Contract Audit Agency (DCAA) to determine whether a contractor’s accounting system is designed and capable of meeting government requirements before the contractor receives its first cost‑type contract.
These audits are typically required when a contractor is being considered for:
- Cost‑reimbursement contracts
- Incentive‑type contracts
- Time‑and‑materials or labor‑hour contracts
- Contracts with progress payments based on cost or performance milestones
Contractors cannot request this audit themselves. Only a Contracting Officer (from the buying command or DCMA) may request DCAA to perform a Pre‑Award Accounting System Audit.
The Purpose of the Audit: What DCAA Is Evaluating
During a Pre‑Award Accounting System Audit, DCAA’s objectives are centered on three core questions:
01
Is the accounting system’s design acceptable for the proposed contract?
02
Can the system accumulate and segregate costs properly under federal cost‑type contracts?
03
Is the system operational, or at least fully set up even if not yet in use?
To answer these questions, DCAA evaluates the contractor against Form SF 1408 – Pre‑Award Survey of Prospective Contractor (Accounting System), which contains criteria covering accounting structure, controls, and compliance.
There Is No Such Thing as a “DCAA‑Approved” Accounting System
One of the most common misconceptions among contractors is the idea of being “DCAA approved.” In reality, DCAA does not approve accounting systems. Instead, DCAA provides audit findings and opinions to the Contracting Officer, who then determines system acceptability.
This distinction matters because the audit focuses on system adequacy, not software brand names or certifications.
What Makes an Accounting System “Acceptable”?
An acceptable accounting system is one that complies with DFARS 252.242‑7006 and provides reasonable assurance that:
- Applicable laws and regulations are followed
- Cost data is reliable and accurate
- Risks of mischarging and misallocation are minimized
- Contract costs are allocated and billed consistently
This includes having documented policies, procedures, and internal controls, not just accounting software.
Many contractors choose solutions such as Deltek Costpoint to support compliance efforts and prepare for the SF 1408 by providing an ERP environment designed for federal contracting. Costpoint offers features that support compliance with DCAA, FAR, CAS, CMMC, and related regulatory requirements, including contract cost tracking, direct and indirect cost segregation, timekeeping and labor distribution controls, indirect rate allocation, and audit‑ready reporting. While DCAA does not “approve” software, Costpoint’s built‑in structure and traceability help organizations maintain audit readiness and more efficiently demonstrate an adequate accounting system when completing the SF 1408 checklist.
Key Areas Reviewed During the Audit
1. Segregation of Direct and Indirect Costs
DCAA evaluates whether the system prevents direct costs from being charged as indirect costs (and vice versa), typically through a properly structured chart of accounts.
2. Cost Accumulation by Contract and CLIN
The system must identify and accumulate direct costs by contract and, when required, by Contract Line Item Number (CLIN) as if each CLIN were its own contract.
3. Indirect Cost Pools and Allocations
Indirect costs must be grouped logically and allocated based on the benefits received, with written descriptions of pools and allocation bases included in accounting policies.
4. Timekeeping and Labor Distribution
Labor charges must be supported by daily timekeeping records that are completed by employees and approved by supervisors. Labor distributions must reconcile to payroll and the general ledger.
5. Exclusion of Unallowable Costs
The accounting system must exclude costs that are unallowable under FAR Part 31, ensuring those costs are not charged - directly or indirectly - to government contracts.
6. Invoicing and Billing Accuracy
Billings must reconcile to the accounting records for both current and cumulative costs and comply with contract terms, including allowable cost and payment requirements.
Common Causes of Audit Findings
Many audit findings stem from preventable gaps, including:
- Failure to properly segregate direct and indirect costs
- Improper or inconsistent timekeeping practices
- Not excluding unallowable costs
- Lack of routine (at least monthly) posting and reconciliation of accounting records
- Invoices that do not reconcile to job cost and general ledger data
Understanding these risks early allows contractors to address issues before the audit begins.
How Small Businesses Can Prepare
DCAA encourages proactive preparation, especially for small businesses entering federal contracting for the first time. Effective preparation includes:
- Completing a detailed SF 1408 narrative explaining how each criterion is met
- Providing accounting policies, procedures, and internal control documentation
- Being prepared to demonstrate financial reports, timekeeping, and cost tracking
- Compiling prior audit history and corrective actions, if applicable
DCAA also provides public guidance and tools specifically designed to help small businesses understand audit expectations and compliance requirements.
- (Presentation) Accounting System Requirements Pre-Awards
- (Checklist) Pre-Award Accounting System Adequacy Checklist
Final Thoughts
A Pre‑Award Accounting System Audit is not about perfection, it’s about readiness. Contractors that understand the purpose of the audit, maintain compliant systems, and document their processes clearly are far better positioned for a smooth contract award process.
For small businesses, early education and preparation can make the difference between a delayed award and a confident step into the federal marketplace.
Our team helps establish compliant accounting systems and prepare for successful DCAA audits.
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Iuvo Systems brings over 17 years of specialized expertise in outsourced accounting and financial services, data analytics and reporting, enterprise system solutions, and GovCon staffing for government contractors and agencies. Our team provides deep knowledge in Government Contracting requirements including DCAA, FAR, and CAS compliance. We work with large prime contractors as well as 8(a), SBA, HUBZone, Women‑Owned, Minority‑Owned, and Veteran‑Owned small businesses that utilize QuickBooks, Deltek Costpoint, and other industry‑specific applications. As a certified 8(a) small business, we are committed to delivering high‑quality, compliance‑driven support across the GovCon landscape.