If DCAA walked into your office tomorrow, would your accounting system pass?
Not your books. Not your tax returns. Your accounting system: the structure, the policies, the controls, and the documentation behind every dollar you bill the federal government. It is tempting to read a balanced set of financials as an adequate system. DCAA does not measure adequacy by whether the numbers balance. DCAA measures adequacy by whether the system itself meets 18 specific criteria outlined in DFARS 252.242-7006.
This DCAA accounting system checklist walks all 18 criteria in the clause, in order, and then the handful of things auditors ask for that the clause never mentions. A DCAA compliant accounting system has to satisfy requirements across cost segregation, timekeeping, labor distribution, budget monitoring, and unallowable cost exclusion.
The gap that sinks a review is rarely a single critical failure. It is documentation. The practices are often sound: costs get segregated, time gets recorded daily. The written policies describing those practices do not exist. DCAA wants the policy as well as the practice, and a system that works correctly but keeps its procedures in people’s heads fails the adequacy test.
Below is the checklist, built from the DFARS adequacy criteria and the SF 1408 evaluation points auditors apply during pre-award and post-award reviews.
What DCAA Evaluates in Your Accounting System
DCAA evaluates accounting systems against the 18 criteria listed in DFARS 252.242-7006, not against generally accepted accounting principles alone. A system passes when it demonstrates the ability to accumulate and segregate costs by contract, cost element, and cost type. A system fails when it lacks even one of these structural capabilities, regardless of how accurate the financial statements look.
The evaluation happens at two points. Before contract award, the contracting officer requests an SF 1408 pre-award accounting system survey to verify your system meets minimum standards. After contract award, DCAA auditors test the system through incurred cost audits, floor checks, and targeted compliance reviews.
Here is what contractors misunderstand. “Adequate” does not mean your books are clean. It means your system has the structural architecture to produce reliable cost data for government billing. A contractor with perfect financials but no written policies for cost segregation will fail. A contractor with a few journal entry errors but strong policies, consistent allocation methods, and documented controls will pass.
The DCAA Accounting System Checklist, All 18 Criteria
Read the structure before you use it, because it decides what a blank row means. Items 1 to 18 are the eighteen criteria in DFARS 252.242-7006(c), in the clause’s own order: fail one and the clause itself supports a finding of inadequacy. Items 19 to 22 are not in the clause. They are things auditors ask for anyway, and a contractor who has them has an easier review. Use the whole table as a self-assessment before a pre-award survey, an incurred cost audit or an internal review.
A note on CAS: Cost Accounting Standards (CAS) are a separate regulatory layer, and the test is per contract, not annual revenue. Two figures currently disagree. The FY2026 NDAA amended 41 U.S.C. 1502(b)(1)(B) directly, so the statute now reads $35 million.
The same subsection also ordered implementing regulations within 180 days and none have issued, and 48 CFR 9903.201-1 still points to the Truth in Negotiations Act threshold of $2.5 million.
Before either figure matters, check the simpler test: 48 CFR 9903.201-1(b)(3) exempts contracts and subcontracts with small businesses from all CAS requirements, at any dollar value. If you are a small business, CAS does not reach you. The old $7.5 million trigger-contract exemption is gone, struck from 41 U.S.C. 1502 by the same NDAA section, though 48 CFR 9903.201-1(b)(7) still prints it because the rule is overdue. Ask your contracting officer to confirm your CAS status in writing. Items below that cite CAS apply only to CAS-covered contractors. The FAR 31.203 citations apply to all cost-reimbursement contractors regardless of CAS coverage.
| Requirement | What DCAA looks for | Your rating |
|---|---|---|
| 1. Sound internal control environment | An accounting framework and organizational structure that make control possible, rather than a set of accounts alone. | ☐ Pass ☐ Partial ☐ Fail |
| 2. Direct costs segregated from indirect | Separate accounts for direct costs, each indirect pool, and unallowables. Same-purpose costs treated the same way [FAR 31.203(b)]. | ☐ Pass ☐ Partial ☐ Fail |
| 3. Direct costs accumulated by contract | Every direct cost traces to a contract number: labor, materials, subcontracts, travel and ODCs. | ☐ Pass ☐ Partial ☐ Fail |
| 4. Logical, consistent indirect allocation | Indirect costs grouped logically, each pool with a base that allocates on benefits accruing [FAR 31.203(c); CAS 418 if fully covered]. | ☐ Pass ☐ Partial ☐ Fail |
| 5. Costs accumulated under general ledger control | Job cost data ties to the general ledger rather than living in a spreadsheet beside it. | ☐ Pass ☐ Partial ☐ Fail |
| 6. Subsidiary ledgers reconciled to the general ledger | Subsidiary cost ledgers and cost objectives reconcile to the general ledger, on a schedule you are able to show. | ☐ Pass ☐ Partial ☐ Fail |
| 7. Adjusting entries approved and documented | Every journal entry carries an approver and a written explanation. No unexplained adjustments. | ☐ Pass ☐ Partial ☐ Fail |
| 8. Management reviews or internal audits | Someone tests the system against your own written policies and practices, and records what they found. | ☐ Pass ☐ Partial ☐ Fail |
| 9. Timekeeping identifies labor by cost objective | Daily time recording by every employee, supervisor approval, corrections documented. No pre-populated timesheets. | ☐ Pass ☐ Partial ☐ Fail |
| 10. Labor distribution charges the right objectives | Approved timesheets flow to the general ledger. The labor distribution report reconciles to timesheets and payroll. | ☐ Pass ☐ Partial ☐ Fail |
| 11. Interim determination of contract costs, monthly at least | Books posted routinely enough that contract cost is knowable each month, not only at year end. | ☐ Pass ☐ Partial ☐ Fail |
| 12. Unallowable costs excluded from what you charge | Entertainment [31.205-14], alcohol [31.205-51], lobbying [31.205-22] and the rest kept out of billings [CAS 405 if covered]. | ☐ Pass ☐ Partial ☐ Fail |
| 13. Costs identified by contract line item and by unit | Where the contract requires it, cost reports break down by CLIN and by unit as if each were a separate contract. | ☐ Pass ☐ Partial ☐ Fail |
| 14. Preproduction costs segregated from production costs | Applies where the contract has a preproduction phase. For most service contractors it is not applicable. | ☐ Pass ☐ Partial ☐ Fail |
| 15. Cost accounting information the funding clauses require | Data for limitation of cost [52.232-20], limitation of funds [52.232-22] and allowable cost and payment [52.216-7], and to calculate indirect rates. | ☐ Pass ☐ Partial ☐ Fail |
| 16. Billings reconcilable to the cost accounts | Current and cumulative amounts claimed reconcile to the cost accounts and comply with contract terms. | ☐ Pass ☐ Partial ☐ Fail |
| 17. Reliable data for pricing follow-on work | Historical cost data good enough to price the next award. Rarely tested first, regularly tested eventually. | ☐ Pass ☐ Partial ☐ Fail |
| 18. CAS-compliant practices, otherwise GAAP | Practices follow the Cost Accounting Standards where they apply, and generally accepted accounting principles where they do not. | ☐ Pass ☐ Partial ☐ Fail |
| 19. Written accounting policies | Documented procedures for timekeeping, compensation, travel, charging, cost accumulation and unallowables. | ☐ Pass ☐ Partial ☐ Fail |
| 20. Chart of accounts built for GovCon | Account structure that supports direct costs, each indirect pool and unallowables without workarounds. | ☐ Pass ☐ Partial ☐ Fail |
| 21. Compensation reasonableness documentation | Benchmarked executive pay, salaries under the FAR 31.205-6(p) cap, bonus criteria written before the period. | ☐ Pass ☐ Partial ☐ Fail |
| 22. Subcontract cost tracking | Subcontract costs tracked apart from other direct costs, with consent documentation where required [FAR 44.201-1]. | ☐ Pass ☐ Partial ☐ Fail |
Print this checklist. Walk through each item with your accounting system open. Every blank in the “Pass” column is a gap DCAA will find before you do.
Five deficiencies come up again and again in adverse accounting system determinations: unallowable costs mixed into indirect pools, missing written timekeeping policies, inconsistent allocation bases, no budget-to-actual tracking, and labor distribution that does not reconcile to timesheets. None of these requires a new software platform to fix.
Which five gaps trigger adverse DCAA accounting system findings?
Five system deficiencies account for the majority of “inadequate” determinations in DCAA accounting system audits. These are not obscure technical violations. They are structural gaps that signal the system lacks the architecture to produce reliable cost data for government billing.
1. No separation of unallowable costs
FAR 31.205 requires contractors to identify unallowable costs and exclude them from government billings. For CAS-covered contractors, CAS 405 adds a formal identification and segregation requirement at the point of recording. The most common failure: entertainment, alcohol, and lobbying expenses sit in the same general ledger accounts as allowable costs. When DCAA pulls your G&A pool and finds $8,000 in client dinners mixed with legitimate travel, the entire pool draws scrutiny.
The structural fix is small. Create dedicated unallowable cost accounts in your chart of accounts. Record every unallowable expense to those accounts on the day it occurs. Never rely on year-end reclassification.
2. Missing or undocumented timekeeping procedures
Timekeeping is DCAA’s number-one audit focus. Auditors test whether employees record time daily, whether supervisors approve timesheets before payroll runs, and whether corrections follow a documented after-the-fact adjustment process.
A contractor with no written timekeeping policy fails this requirement automatically, even if employees actually record time every day.
The documentation matters as much as the practice. Write the policy. Train employees on it. Keep the training records.
3. Inconsistent cost allocation
A cost classified as direct on one contract and indirect on another violates CAS 402 for CAS-covered contractors, and violates FAR 31.203(b) for all cost-reimbursement contractors. Read 31.203(b) literally: no final cost objective carries a cost as indirect where costs incurred for the same purpose, in like circumstances, were charged direct to that or any other final cost objective. DCAA tests this by pulling the same cost type across multiple contracts. If engineering supplies are a direct charge on Contract A but included in overhead on Contract B, the auditor flags a consistency failure. This single finding triggers a review of every cost pool.
4. No budget-to-actual tracking
Cost monitoring against the funded amount is not one of the 18 criteria, which is worth knowing before you go looking for it. It arrives through criterion (15), which requires the system to produce the cost accounting information called for by the limitation of cost clause [FAR 52.232-20], the limitation of funds clause [FAR 52.232-22], and the allowable cost and payment clause [FAR 52.216-7]. Those clauses put the duty on you to warn the government before costs pass the funded amount, so the system has to be able to see it coming.
Many small contractors skip this because fixed-price work does not require it. Then they win a cost-plus contract and realize their system has no mechanism for tracking cost performance against the funded amount. The gap becomes visible during the first quarterly review.
5. Weak labor distribution
The labor distribution report is the bridge between timesheets and the general ledger. DCAA reconciles three documents: timesheets, the labor distribution report, and payroll records. When hours on the timesheet do not match hours on the labor distribution report, the auditor questions every labor charge on every contract. A $200 discrepancy in one pay period triggers a system-wide labor review.
What is the difference between having a DCAA-compliant system and proving it works?
Passing a DCAA accounting system review requires two things: a system that meets every DFARS criterion, and documentation proving the system operates as designed. The system is the half that gets built. The documentation is the half that gets skipped. The documentation is where audits are won or lost.
DCAA does not accept “we do it this way” as evidence. The auditor asks for the written policy, then tests whether actual practice matches the written policy. A contractor who segregates unallowable costs correctly but has no written policy describing the segregation method fails the documentation requirement under DFARS 252.242-7006.
| System Element | Having It | Proving It |
|---|---|---|
| Timekeeping and labor | Employees record time daily | Written timekeeping policy, signed employee acknowledgments, correction log with supervisor approvals |
| Cost segregation and pools | Separate accounts for direct, indirect, unallowable | Written charging policy specifying which costs go where, with examples |
| Indirect rates and bases | Consistent allocation bases applied each period | Written description of each pool, its allocation base, and the rationale for the base selection |
| Compensation and bonuses | Salaries within FAR caps | Compensation plan with salary benchmarks, bonus criteria documented before the performance period |
| Internal controls and review | Approval workflows in place | Written procedures manual, segregation of duties matrix, documented review schedules |
The timing is the part that catches people: the documentation has to exist before the auditor asks for it. Creating policies during the audit signals to DCAA the system operated without controls. Retroactive documentation does not cure the compliance gap for the period it was missing.
Setting Up a DCAA Compliant Accounting System in QuickBooks
QuickBooks supports DCAA compliance when configured correctly. The default setup does not meet a single requirement on the checklist above. Building a DCAA compliant accounting system in QuickBooks requires restructuring the chart of accounts, enabling job costing, connecting a compliant timekeeping tool, and creating the indirect cost pool hierarchy that maps to your rate structure.
Start with the chart of accounts structure. Create parent accounts for each indirect cost pool: fringe benefits, overhead, and G&A. Under each parent, create sub-accounts for specific cost types. Create a separate parent account group for unallowable costs. This structure gives you the segregation that criteria 2, 4 and 12 require.
Enable class tracking to separate costs by contract. Each active contract gets its own class or customer:job. Every direct cost transaction includes the contract identifier. This gives you the job-cost traceability that criterion 3 requires.
Connect a DCAA-compliant timekeeping system. QuickBooks Time (formerly TSheets) integrates directly and supports daily time entry, supervisor approvals, and after-the-fact corrections with full documentation of who changed what and why (verified against Intuit documentation, March 2026). The timesheet data must flow into your labor distribution without manual re-entry. Manual re-entry creates the reconciliation gaps DCAA tests for. Our QuickBooks DCAA setup guide walks through each configuration step.
Budget-versus-actual reporting requires either QuickBooks’ built-in budget module or an external report. Create a budget for each cost-type contract. Run the budget-versus-actual comparison monthly. Export and save the report. The auditor will ask for it.
Running the DCAA Accounting System Checklist Yourself
Print the checklist from the table above. Block two hours with your bookkeeper or controller. Open your accounting system and test each requirement live. Do not answer from memory. Pull the actual reports, policies, and account structures.
For each checklist item, assign one of three ratings:
- Pass The system meets the requirement, and written documentation exists to prove it.
- Partial The system partially meets the requirement, or the practice exists but the documentation does not.
- Fail The system does not meet the requirement.
A “Fail” anywhere in items 1 to 18 is a gap on the clause itself, and a material weakness there is grounds for a system disapproval determination under DFARS 252.242-7006. Fix those first. Items 19 to 22 are not in the clause, so a gap there costs you goodwill and time rather than a determination.
“Partial” ratings on the documentation items are the fastest to fix. Writing the policy takes a day. Implementing a system change takes weeks. Prioritize documentation gaps second because they deliver the highest compliance return for the time invested.
Run this assessment quarterly. The indirect rate calculator helps you verify your cost pool structure aligns with the allocation bases documented in your policies.
Frequently Asked Questions
What is a DCAA compliant accounting system?
A DCAA compliant accounting system meets every adequacy criterion in DFARS 252.242-7006. It must segregate direct and indirect costs, track costs by contract, exclude unallowable expenses from billing, maintain daily timekeeping records, and produce budget-versus-actual reports.
Written policies documenting each of these functions are required.
Does QuickBooks work for DCAA compliance?
QuickBooks supports DCAA compliance when configured with a GovCon-specific chart of accounts, job costing enabled by contract, indirect cost pool accounts, unallowable cost segregation, and a connected timekeeping system. The default QuickBooks setup does not meet DCAA requirements.
What happens if DCAA finds my system inadequate?
An inadequate system determination can result in payment withholding under DFARS 252.242-7005, the Contractor Business Systems clause, though only on contracts subject to the Cost Accounting Standards. Get the roles right, because they decide who you are actually dealing with.
DCAA audits and recommends. The contracting officer issues the initial determination, weighs your response, issues the final determination, and signs the notice to withhold.
Where a material weakness is found in one business system the withholding is 5% of progress payments and performance-based payments, rising to 10% only where material weaknesses span multiple systems. You have 45 days to correct the weakness or submit a corrective action plan, and once the contracting officer accepts that plan the withholding falls to 2%. Withholding continues until the contracting officer determines the deficiency is corrected and new contract awards on cost-type work are at risk until adequacy is restored.
How often does DCAA audit accounting systems?
DCAA conducts pre-award system reviews before cost-type contract awards using the SF 1408 survey. Post-award reviews happen during incurred cost audits, which DCAA performs after receiving the contractor’s annual incurred cost submission. Floor checks (unannounced site visits testing timekeeping) occur on their own schedule, often without advance notice.
What written policies does DCAA require?
DCAA expects written policies covering timekeeping procedures, compensation and benefits, travel reimbursement, direct and indirect cost charging, unallowable cost identification, and purchasing and subcontracting. Each policy must describe the procedure, assign responsibility, and match actual practice. Property management policies are evaluated separately under DFARS 252.245-7003 (Government Property), not under the accounting system standard.
Policies created after the audit starts do not satisfy the requirement retroactively.
Key Takeaways
- Print and complete the full checklist against your live system. Do not answer from memory. Pull actual reports and policies. Every blank is a gap DCAA will find.
- The five most common failure points are unallowable cost segregation, timekeeping documentation, allocation consistency, budget-to-actual reporting, and labor distribution reconciliation. Fix these first.
- Documentation is half the requirement. A system that works correctly but lacks written policies fails the DFARS 252.242-7006 adequacy test.
- Run a self-assessment every quarter. System gaps compound, and unwinding a year of misclassified history costs more than charging it correctly the first time.
Amerifusion Bookkeeping builds and reviews DCAA compliant accounting systems for government contractors at every stage: pre-award, post-award, and ongoing monitoring. Take the Compliance Readiness Check to identify your system gaps, or book a discovery call to walk through the checklist with a CPA-supervised team.
