The Myth of DCAA Approved Accounting Software - Part II

In Part I of this series, we warned against buying in to the myth that there are accounting software applications that have been approved by the Government for Government contracting purposes. The Government does not approve accounting software. Nearly every appplication available can be used for Government contracting. If you are satisfied with your current accounting software, you should stick with it. While the Government neither approves or disapproves specific software applications, it is interested in making sure that contractor accounting systems are capable of recording, accumulating, and reporting costs in a manner consistent with contract terms. In this part, we discuss the characteristics of what the Government looks for in an accounting system.

Do not confuse the terms "accounting software" and "accounting system". The two terms are not synonimous. The term accounting system encompasses all aspects of the accounting function including the software, personnel, management, policies and procedures, data entry, reporting, supporting documentation, and internal controls. When evaluating whether a prospective contractor has an adequate accounting system, the Government utilizes form SF 1408, Preaward Survey of Prospective Contractor Accounting System, a series of yes/no questions asking whether the system can accomplish certain tasks including;

1. Is the system maintained in accordance with GAAP (Generally Accepted Accounting Procedures)? The main idea here is whether the accounting records are maintained on an "accrual basis". A "cash basis" of accounting is not GAAP.
2. Does the accounting system provide for proper segregation of direct costs from indirect cost and can direct costs be accumulated by contract? Can direct costs by contract be further broken down by contract line item if required? Can preproduction costs be segregated from product costs?
3. Are indirect costs allocated to contracts in a logical and consistent manner? FAR 31.203 requires that indirect costs be allocated to contracts on the basis of the benefits accruing to those contracts.
4. Do all costs roll up to a general ledger? This is an obvious "yes" when using today's accounting software.
5. Does it include a timekeeping system that identifies labor charges by contract or indirect function?
6. Does it include a labor distribution system (hours generated by the timekeeping system times labor rates from the payroll system) that charges costs to the appropriate contract or indirect cost pool.
7. Can it produce monthly (or more frequent) determination of costs by contract? This means that accrued costs must be computed at least monthly.
8. Are there procedures to identify and exclude FAR Part 31 unallowable costs from billings (see FAR 31.201-6)?
9. Can the system provide financial information to support public vouchers (cost reimbursable contracts) and progress payments?
10. Is the system designed and are records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on contracts?
11. Is the system in full operation?

If your accounting system is capable of accomplishing the foregoing, it is adequate for Government contracting purposes.