Pay BillInsights from Joy Parker, Senior Manager
For government contractors, few questions carry more weight than this one: Do you have an approved accounting system? It sounds straightforward, but the answer, and what it takes to get there, can mean the difference between landing a lucrative cost-type contract and watching that opportunity walk out the door.
Understanding what an approved accounting system requires, and why the government cares so much about it, is essential knowledge for any contractor serious about growing in the federal marketplace. DCAA provides a range of tools and checklists designed to help organizations understand their requirements and expectations when auditing your accounting system.
Why an Approved Accounting System Matters
On a fixed-price contract, the financial risk rests entirely with the contractor. The government pays the agreed-upon price, regardless of actual costs. Cost-type contracts operate differently. When the government shares financial risk, they need assurance that a contractor’s accounting system can accurately track, report, and bill every dollar spent.
The stakes are real on both sides of the equation. As Joy Parker explains: “If your G&A was proposed at 15% and you ended up at 23%, they probably owe you about 8% more in G&A. They don’t want to do that all the time, so they want to make sure that your system is adequate in budgeting and planning and billing.”
An accounting system review, typically conducted by the Defense Contract Audit Agency (DCAA), is the government’s way of verifying that a contractor’s system can meet that standard. Passing that review is not just a compliance milestone. It is a competitive differentiator that opens doors to contract vehicles that would otherwise remain out of reach.
The Four Pillars of an Approved Accounting System
An approved accounting system is built on four core components, each of which plays a specific role in demonstrating financial accountability to government auditors:
Written Accounting Policies and Procedures: A documented framework that outlines how costs are tracked, allocated, and reported. Policies must reflect actual practice, not aspirational standards. “It’s a big red flag if you put in something that you’re not really doing,” Parker notes. These documents should be treated as living records, updated at least annually to reflect business growth and changes.
Accounting Software Configured for Projects and Indirect Rates: The software itself is only part of the equation. The way it is set up and configured to handle project-level cost tracking and indirect rate calculations is what auditors are evaluating.
Properly Trained Staff or a Qualified Third-Party Partner: Even the best system fails without the right people operating it. Whether that means in-house expertise or an experienced outside partner, contractors need someone who understands government contracting accounting requirements.
Successful Audit by DCAA: It is imperative to be prepared to respond to DCAA requests and provide sufficient documentation for the agency to determine your accounting system is adequate.
The Software Misconception
One of the most common misunderstandings in government contracting is the belief that purchasing recognized accounting software is the same as having an approved accounting system. It is not. Platforms like Deltek, Costpoint, and Unanet are widely respected and considered DCAA-compliant tools, but the software alone does not constitute approval.
“The system means much more than the software you use,” Parker emphasizes. Proper configuration, including project-level cost tracking and indirect rate structures, is what makes a system audit-ready. Smaller contractors, in particular, should know that high-cost ERP systems are not a prerequisite for compliance. Many have achieved full approval using QuickBooks supplemented with Excel-based indirect rate calculations, scaling up to more robust platforms only as contract complexity demands it.
What the DCAA Audit Process Actually Looks Like
For contractors who have never been through a DCAA accounting system review, the process can feel opaque. In practice, it follows a fairly predictable sequence. Auditors will request a standard set of documents, including a trial balance, chart of accounts, financial statements, general ledger detail, and labor and travel reports. Before submitting anything, Parker’s guidance is clear: “Make sure you reconcile, reconcile, reconcile before you shoot them to DCAA.”
Once documents are submitted, auditors will conduct a walkthrough, increasingly via video conference, during which they select samples from the submitted reports and trace transactions through the entire accounting system. They may observe an accounts payable entry being made in real time, verify its approval, and follow it through to payment. They may pull a specific labor entry from a timesheet and confirm that the hours and dollar amounts flow accurately through to a client’s invoice.
Consistency is everything. A report submitted to DCAA before the audit must match the same report pulled during the walkthrough, even if weeks or months have passed. Any discrepancy is a serious red flag that can derail the entire review.
The 72-Hour Rule: Preparation Is Not Optional
A critical benchmark for audit readiness is what Parker refers to as the 72-hour rule: when DCAA requests documentation, contractors should be able to deliver everything, written policies, the completed SF1408 checklist, financial reports, and all supporting materials, within 72 hours. “If you get the notification of an audit and then start scrambling to write accounting policies, it’s not going to happen in 72 hours,” Parker cautions.
The consequences of being unprepared extend beyond the audit itself. Delays in the accounting system review can directly delay contract awards. Parker has seen it happen: a contractor moving from an SBIR Phase 1 fixed-price contract into a cost-plus Phase 2 was caught without written policies at the exact moment the accounting system review requirement surfaced. The customer was cooperative enough to allow temporary continuation on a fixed-price basis, but as Parker makes clear, “That doesn’t always happen. You do not want to lose on a contract because you’re not prepared.”
How BMSS Supports Government Contractors
Achieving and maintaining an approved accounting system is not a one-time event. It requires ongoing attention, consistent processes, and a team that understands the ever-evolving expectations of government auditors. BMSS works with government contractors at every stage of that journey, from developing written accounting policies and procedures and configuring accounting systems for DCAA compliance, to conducting mock audits and providing assurance letters that can be submitted with proposals before a formal DCAA audit has even taken place.
As Parker puts it, “It takes a lot, being a federal government contractor. It brings along a lot of responsibility, but it also brings a lot of growth for your company.” An approved accounting system is where that growth begins.
To learn more about how BMSS can support your government contracting needs, visit www.bmss.com.
