DCAA written accounting policies are the documented rules governing how a government contractor records costs, distributes labor, allocates indirect expenses, and identifies unallowable charges.
DCAA auditors expect specific written policies in place before the first audit. Missing or incomplete documentation is the fastest path to a system inadequacy finding [DFARS 252.242-7006].
Here is the part that surprises contractors. An accounting system passes every technical test, with a correctly structured chart of accounts and defensible indirect rates, and still draws a finding, because the auditor is asking a different question than whether the system works today.
The question behind the whole review is whether it keeps working when the person who built it leaves. A written timekeeping policy and documented procedures for identifying unallowable costs are how you answer that in a form an auditor is able to test. The difference between a passing and failing accounting system often comes down to nine documents sitting in a policy binder.
Why Does DCAA Require Written Accounting Policies?
DCAA accounting system requirements under DFARS 252.242-7006(c) list 18 criteria for an adequate system. Nearly every criterion requires documented procedures, not informal practices. The SF 1408 Pre-Award Survey evaluates these same criteria during initial system reviews, and the back page of that form is the evaluation checklist auditors use to score your system [DCAA Pre-Award Checklist].
The logic is straightforward. A verbal explanation of how costs are charged is one person’s memory. A written policy is an organizational commitment.
When DCAA audits your accounting system, the auditor evaluates three things in order: Do written policies exist? Do they comply with FAR, CAS, and DFARS? Are employees following them?
Without the first element, the second and third are irrelevant. A capable system still fails the review when nothing documents it, because capability on its own is not testable. Your government contractor accounting policies are the foundation DCAA builds every other evaluation on top of.
The 9 DCAA Written Accounting Policies Every Contractor Needs
Not all policies carry equal weight during an audit. The following nine DCAA policies and procedures are the ones auditors specifically request during pre-award surveys and accounting system reviews. Missing any one of them creates a finding.
1. Timekeeping Policy
Your timekeeping policy documents how employees record time, the approval workflow, correction procedures, and record retention rules. It must require daily, contemporaneous recording by the employee performing the work. Supervisory approval should occur within one business day; auditors expect a timeframe close enough to the work that the supervisor actually knows what was performed.
A policy stating “employees must track their time” fails. DCAA expects specifics: who records, when they record, what charge codes they use, how corrections are handled, and who approves. See our full breakdown of DCAA timekeeping requirements for the eight criteria auditors evaluate.
2. Labor Distribution Policy
Labor distribution describes how employee hours and dollars are allocated across direct contracts, indirect pools, and unallowable activities. This policy must document how labor costs flow from timesheets to the general ledger, the reconciliation process (monthly at minimum), and the approval controls over labor cost transfers between accounts.
The auditor checks whether your labor distribution report reconciles to your general ledger labor accounts. What draws the finding is an unreconciled variance with no documented procedure for resolving it, rather than any particular dollar amount.
3. Direct/Indirect Cost Segregation Policy
This policy defines the criteria for classifying a cost as direct (charged to a specific contract) or indirect (allocated across multiple contracts through a cost pool). It must describe each indirect cost pool, the allocation base for each pool, and the logic for determining when a cost is direct versus indirect [FAR 31.203(c)].
The fringe, overhead, and G&A pool structure is common practice for cost-reimbursement contractors, not a mandated pool count. FAR 31.203(c) requires the contractor to accumulate indirect costs by logical cost groupings, and sets the test for the base: it “shall allocate the grouping on the basis of the benefits accruing to intermediate and final cost objectives.” Benefits accruing, which is a narrower test than a general appeal to fairness. The specific pool structure should reflect your business and be applied consistently.
Consistency matters here more than perfection. DCAA will accept a reasonable allocation method applied consistently. They will not accept a method that changes contract to contract without written justification.
4. Unallowable Cost Identification Policy
FAR 31.205 addresses dozens of specific cost categories with defined allowability rules. Your policy must document how your organization identifies expressly unallowable costs, flags them at the point of entry, and excludes them from billing. The policy must reference the specific FAR 31.205 subsections relevant to your business: entertainment [FAR 31.205-14], alcoholic beverages [FAR 31.205-51], lobbying [FAR 31.205-22], and fines [FAR 31.205-15] at minimum.
A policy saying “we exclude unallowable costs” is a deficiency. The auditor wants to see how: which account codes are flagged, who reviews transactions, and what happens when an unallowable cost is accidentally charged to a contract. Full details on the cost categories in our unallowable costs guide.
5. Travel Policy
FAR 31.205-46 governs allowable travel costs and sets requirements for airfare documentation, lodging limits, and meal reimbursement. DCAA expects a written travel policy as part of an adequate accounting system [DFARS 252.242-7006] that operationalizes these FAR 31.205-46 requirements. Your policy must address pre-trip authorization procedures, airfare (including documentation of lowest-fare searches), lodging limits (tied to GSA per diem rates or your own reasonable limits), meal reimbursement method (actual cost or per diem), and documentation requirements: date, place, purpose, and name of traveler [DCAA Selected Area of Cost Guidebook, Chapter 72].
The most common travel deficiency: no pre-authorization process. An employee books a $1,800 flight without advance approval, and the auditor questions the entire trip cost because the policy did not require documented approval before travel occurred.
6. Compensation Policy
Your compensation policy documents salary structures, bonus criteria, overtime rules, and the methodology for determining that total compensation is reasonable for the work performed. DCAA evaluates compensation under FAR 31.205-6, which requires that compensation be reasonable in amount and tied to the employee’s duties, responsibilities, and qualifications.
As a practical matter, once government revenue reaches a level where compensation claims are likely to draw scrutiny, DCAA expects documented benchmarking against Bureau of Labor Statistics data or a recognized salary survey. The larger the compensation claim, the more important the documentation. The policy must also address executive compensation limits under FAR 31.205-6(p), which the Office of Federal Procurement Policy adjusts annually.
Be careful which year you are working in. The CY2025 cap is $671,000, issued in DCAA Memorandum 24-PSP-009(R). The CY2026 figure has still not been published. The equivalent memorandum was due around December 2025 and is months overdue, so a policy written today should say how the company will treat compensation in the interim and mark those entries for a re-run once the official number is published. Our 2026 compensation cap article tracks the position and the working estimate.
7. Purchasing and Subcontracting Policy
This policy defines approval thresholds for purchases, competitive bidding requirements, sole-source justification procedures, and subcontractor oversight. It must establish dollar thresholds for different levels of approval authority. A $500 purchase requires a different approval process than a $50,000 subcontract.
DCAA cross-references your purchasing policy against actual transactions during incurred cost audits. Purchases above your stated threshold without the required approvals generate questioned costs.
8. Billing and Revenue Recognition Policy
Your billing policy documents how invoices are prepared, what costs are included, the approval process before submission to the government, and how provisional billing rates are applied. It must address the reconciliation between billed costs and recorded costs in the general ledger.
This policy connects directly to FAR 52.216-7 (Allowable Cost and Payment) for cost-reimbursement contracts. The auditor traces a sample of invoiced costs from the billing back through the general ledger to source documents. A billing policy gap means every invoice during the gap period becomes a questioned cost.
9. Accounting System Overview and Internal Controls Policy
The capstone policy describes your overall accounting framework: chart of accounts structure, general ledger system, period-end closing procedures, journal entry approval process, and management review controls. It must document segregation of duties and identify the internal audit or management review procedures that verify compliance with all other written policies.
Criterion (8) of DFARS 252.242-7006(c) requires “[m]anagement reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices.” Two details in that wording carry weight. The verb is stronger than a review for its own sake, and the requirement reaches procedures and accounting practices, not policies alone. This policy is where you document that review process. Without it, the auditor has no evidence that anyone in your organization checks compliance.
What Does a DCAA Accounting Policy Deficiency Look Like?
DCAA does not issue findings because a policy is imperfect. They issue findings because a policy is missing, incomplete, or not followed. The table below sets out, for each policy area, what a missing policy and an incomplete policy each look like. Treat it as a drafting checklist rather than a tally of published findings, because DCAA does not publish deficiency counts at that level of detail.
| Policy Area | Missing Policy Finding | Incomplete Policy Finding |
|---|---|---|
| Timekeeping | No documented timekeeping procedures; all labor charges questioned | Policy exists but does not address corrections or uncompensated overtime |
| Labor distribution | No reconciliation between timesheets and general ledger | Monthly reconciliation documented but no procedure for resolving variances |
| Cost segregation | No written criteria for direct vs. indirect classification | Policy describes pools but not the allocation base or methodology |
| Unallowable costs | No process for flagging unallowable costs at point of entry | Policy lists some FAR 31.205 categories but omits entertainment and lobbying |
| Travel | No written travel policy; all travel costs at risk of disallowance | Policy addresses lodging limits but has no pre-authorization requirement |
| Compensation | No documentation of reasonableness for salary levels | Salary ranges exist but no benchmarking against market data |
| Purchasing | No approval thresholds at all, so no purchase is demonstrably authorized | Thresholds documented but no sole-source justification procedure |
| Billing | No documented process for preparing and approving government invoices | Billing process described but no reconciliation to general ledger required |
| Internal controls | No management review process documented; system adequacy at risk | Reviews occur but are not documented with findings and corrective actions |
The pattern is consistent. DCAA does not need to prove your system failed. They need to show your policies do not demonstrate it will succeed.
The burden of proof falls on the contractor.
Building Your DCAA Written Accounting Policies From Scratch
A 50-page policy manual is not the goal. The goal is a set of clear, specific documents that let an auditor read quickly and conclude that this contractor knows what they are doing. Here is the framework for building DCAA written accounting policies that pass audit scrutiny.
Structure each policy the same way:
- Purpose. One sentence stating what the policy governs and why.
- Scope. Who the policy applies to: all employees, accounting staff, project managers, or executives.
- Regulatory basis. The specific FAR, DFARS, or CAS citations the policy implements.
- Procedures. Step-by-step instructions for how the process works in daily operations. This is the section that must be specific. “Costs are reviewed for allowability” fails. “The controller reviews all transactions over $1,000 against the FAR 31.205 unallowable cost matrix before posting to the general ledger” passes.
- Approval authority. Who approves actions at each dollar threshold or decision point.
- Record retention. How long records are maintained and where they are stored.
- Review cycle. How often the policy is reviewed and updated. Annual review at minimum.
A 3-page timekeeping policy with clear procedures is worth more to an auditor than a 30-page document full of generalities. Specificity is the quality signal. The SF 1408 pre-award survey evaluates these exact documents, and an auditor forms a view quickly. Specific procedures read as a system; general commitments read as an intention.
Maintaining Policies After the Initial Build
DCAA policies and procedures are not one-time documents. They require active maintenance. A policy written in 2022 that references provisional billing rates from 2021 tells the auditor nobody has reviewed it since then.
Three maintenance rules protect your investment:
- Annual review with sign-off. The controller or CFO reviews each policy annually and signs a review sheet documenting any changes or confirming no changes are needed. This creates the audit trail DCAA expects.
- Trigger-based updates. As a practical matter, any change to your chart of accounts, indirect rate structure, accounting software, or contract mix should trigger a policy review within 30 days. Moving from two indirect pools to three requires an updated cost segregation policy before the next billing cycle.
- Employee acknowledgment. Employees sign an acknowledgment that they have read and understood the policies relevant to their role. DCAA evaluates whether employees actually follow the policies, not simply whether the policies exist. A signed acknowledgment with training documentation closes that loop.
As a practical matter, contractors preparing for their first DCAA accounting system review should have all nine policies in place at least 60 days before the expected audit date. Draft status is acceptable for the initial review, but every policy must be documented, not verbal.
Frequently Asked Questions
What written accounting policies does DCAA require?
DCAA expects written policies covering timekeeping, labor distribution, direct and indirect cost segregation, unallowable cost identification, travel, compensation, purchasing, billing, and internal controls. These policies must reference specific FAR and DFARS requirements and describe actual procedures your organization follows [DFARS 252.242-7006].
Does DCAA accept draft policies during a pre-award survey?
Yes. DCAA accepts draft policies during an SF 1408 pre-award survey if the drafts demonstrate the contractor understands the requirements and has documented specific procedures. Policies do not need professional formatting, but they must address the substance: who does what, when, and how.
How long should each written accounting policy be?
Most effective policies run 2 to 5 pages. Length matters less than specificity. A 3-page timekeeping policy with step-by-step correction procedures outperforms a 20-page document filled with vague statements.
What happens if DCAA finds a missing policy during an audit?
A missing policy triggers a deficiency finding under DFARS 252.242-7006. The contracting officer receives the finding and decides on corrective action. Payment withholding of 5% applies under DFARS 252.242-7005 (Contractor Business Systems) when the contracting officer makes a final determination of a material weakness in your accounting system. If two or more of your six contractor business systems have material weaknesses, withholding increases to 10%. The contracting officer issues a corrective action request, and withholding continues until the contracting officer determines that you have corrected all material weaknesses [DFARS 252.242-7005(e)].
DFARS 252.242-7005 applies only to contracts subject to the Cost Accounting Standards, and small businesses are exempt from CAS at any contract value [48 CFR 9903.201-1(b)(3)]. If you qualify as a small business, this withholding does not reach you. An inadequate accounting system still matters: a cost-reimbursement contract can only be awarded when your accounting system is adequate [FAR 16.301-3(a)(3)].
How often must DCAA written accounting policies be updated?
DCAA expects annual reviews at minimum. Beyond the annual cycle, as a practical matter, policies should be updated within 30 days of any change to your accounting system, chart of accounts, indirect rate structure, or contract mix. Each review must be documented with the reviewer’s signature and date, even if no changes are made.
Are DCAA written accounting policies required for fixed-price contracts?
Written policies become mandatory when a contractor holds any cost-reimbursement, time-and-materials, or cost-plus contract, or when a fixed-price contract includes the DFARS 252.242-7006 clause. Contractors pursuing their first cost-type contract will face an SF 1408 survey requiring all policies before award.
Key Takeaways
- Nine written policies form the foundation of DCAA compliance. Timekeeping, labor distribution, cost segregation, unallowable costs, travel, compensation, purchasing, billing, and internal controls. Missing any one creates an audit deficiency.
- Specificity beats length. A 3-page policy with step-by-step procedures and FAR citations passes. A 20-page policy with vague commitments fails.
- Draft policies are acceptable for initial reviews. As a practical matter, have all nine documented at least 60 days before your expected audit. Finalize them before cost-type billing begins.
- Maintenance is half the work. An outdated policy is nearly as damaging as a missing one. Annual reviews with sign-off, trigger-based updates, and employee acknowledgments keep your policies audit-ready.
- A capable system still fails without documentation. The auditor cannot test capability directly. Written policies are what make the system reviewable, which is why the paperwork is the part that decides the outcome.
Get Your Policies Audit-Ready Before DCAA Asks
Building nine written policies from scratch takes focused effort. Getting them wrong costs more. Take the Compliance Readiness Check to identify which policies your system is missing today.
For a CPA-managed review of your full policy framework, book a discovery call with Amerifusion Bookkeeping or explore our DCAA compliance services.
