You won a government contract. Congratulations. Now the clock starts. Within 90 days, you need an accounting system the Defense Contract Audit Agency will not tear apart. This government contract accounting checklist breaks the setup into four phases, week by week, so nothing falls through the cracks.
Amerifusion Bookkeeping built this checklist from real client engagements. We have watched contractors lose billing privileges, delay their first invoice by months, and trigger $50,000 corrective action plans because they skipped steps in the first 90 days. Every task below exists because we have seen what happens when it gets missed.
This is not the same article as our GovCon 101 guide, which explains the concepts behind government accounting. This is the execution plan. Print it. Check things off. If a task feels over your head, that is your signal to bring in professional help before the auditor does it for you.
Phase 1: Foundation (Days 1 to 14)
The first two weeks are about building the right structure. Every decision you make here cascades through your billing, your indirect rates, and your audit trail for the life of the contract. Get this wrong, and you will rebuild it later at three to five times the cost.
Week 1: Chart of Accounts and Cost Structure
| Task | Why It Matters | Standard |
|---|---|---|
| Create a GovCon-specific chart of accounts | Default QuickBooks charts do not separate direct, indirect, and unallowable costs | FAR 31.201 |
| Set up cost pools: Fringe, Overhead, G&A | Indirect costs must accumulate in defined pools before allocation to contracts | FAR 31.203 |
| Create an unallowable cost account | Entertainment, alcohol, lobbying, and other prohibited costs must be flagged at the point of entry, not at year-end | FAR 31.205 (multiple subsections) |
| Open a separate bank account for government contract funds | Commingling government and commercial funds creates audit confusion and cash flow risk | Best practice |
| Set up job costing by contract number | Every direct cost must trace to a specific contract. Your accounting system must produce a cost-by-contract report on demand. | DFARS 252.242-7006(c)(1) |
If you are using QuickBooks, our QuickBooks DCAA setup guide walks through the exact configuration. The key: do not add a single transaction to your books until the chart of accounts is built for government work.
Week 2: Timekeeping System
Timekeeping is the single most audited area in government contracting. DCAA reviews labor records in nearly every audit engagement. A non-compliant timekeeping system does not get a warning. It gets a finding, and billing withholding follows.
| Task | Why It Matters | Standard |
|---|---|---|
| Implement daily time entry by each employee | Weekly or retroactive time entry is a common DCAA finding. Employees must record their own time, daily. | DCAA Contract Audit Manual 6-406 |
| Set up charge codes for each contract and indirect pool | Every hour must charge to a specific contract (direct) or indirect pool (overhead, G&A, IR&D) | DFARS 252.242-7006(c)(5) |
| Establish supervisor approval workflow | Time entries require supervisor review and approval before they feed into cost accumulation | DCAA CAM 6-406.b |
| Confirm audit trail for corrections | If an employee changes a time entry, the original entry, the correction, the reason, and the approver must all be preserved | DCAA CAM 6-406.e |
| Train all employees on timekeeping policy | DCAA will interview employees during floor checks. If employees do not know the policy, the system fails regardless of its design. | DCAA Floor Check procedures |
Popular compliant timekeeping tools include Unanet, Deltek Costpoint, Hour Timesheet, and Procas. QuickBooks Time (formerly TSheets) works for smaller contractors when configured with the right charge code structure. The tool matters less than the discipline: daily entry, supervisor approval, audit trail.
Phase 2: Policies and Documentation (Days 15 to 30)
DCAA auditors do not accept verbal descriptions of how your company operates. They require written policies, signed by management, covering every area of cost charging. “We have always done it this way” is not a policy. A dated, signed document describing the method and the rationale is.
Week 3: Written Accounting Policies
| Policy | What It Covers | Why DCAA Requires It |
|---|---|---|
| Timekeeping Policy | Daily entry requirement, charge codes, correction procedures, supervisor approval, floor check protocol | Validates labor cost charging across all contracts |
| Compensation Policy | Salary and bonus structure, reasonableness benchmarks, executive comp limits ($671,000 cap for CY2025 per DCAA 24-PSP-009(R)) | FAR 31.205-6 governs allowability of compensation costs |
| Travel Policy | Approval requirements, per diem rates (GSA or JTR), documentation standards | FAR 31.205-46 governs travel cost allowability |
| Purchasing Policy | Approval thresholds, competitive bidding requirements, documentation for sole-source purchases | Validates material and subcontract cost charging |
| Cost Accounting Practice Statement | How you classify direct vs. indirect, allocation bases for each pool, consistency commitments | CAS 401 (consistency) and CAS 402 (full allocation) apply to CAS-covered contracts |
Each policy should be two to four pages. Longer documents signal overengineering. Shorter documents signal gaps. The sweet spot: specific enough for an auditor to verify compliance, short enough for every employee to read and follow.
Week 4: Internal Controls
Internal controls separate accounting systems that pass audits from accounting systems that survive them. The SF 1408 pre-award survey evaluates your controls directly. If a pre-award audit is coming (and for cost-type contracts, it is), these controls must exist before the auditor arrives.
- Segregation of duties. The person who approves purchases should not be the same person who records them. For companies under 10 employees, a compensating control (owner review of all transactions monthly) substitutes for full segregation.
- Monthly reconciliation process. Bank reconciliations, indirect rate calculations, and contract cost summaries produced monthly. Not quarterly. Not at year-end.
- Unallowable cost screening. Every expense entry gets checked against FAR 31.205 categories before posting. Build this into your chart of accounts with a dedicated unallowable account, not into a manual year-end review.
- Document retention policy. All financial records, timesheets, receipts, and policies must be retained for a minimum of three years after final contract payment (per FAR 4.705). Six years is the practical recommendation given audit timelines.
Phase 3: Rates and Billing (Days 31 to 60)
With your structure and policies in place, month two is about establishing the numbers you will bill against. Provisional billing rates and indirect rate structures determine your cash flow for the life of the contract. Get them wrong, and you either overbill (triggering audit findings and repayment) or underbill (leaving money on the table and starving cash flow).
Indirect Rate Structure
Most new contractors need three indirect cost pools. Your specific structure depends on your cost base and contract mix.
| Pool | What Goes In | Typical Allocation Base |
|---|---|---|
| Fringe | Health insurance, FICA, FUTA/SUTA, workers comp, PTO, retirement contributions | Direct labor dollars |
| Overhead | Facilities, equipment, indirect labor (project managers, IT support), supplies | Direct labor dollars (or direct labor + fringe) |
| G&A | Executive salaries, accounting, legal, marketing, rent (if not in overhead), business insurance | Total cost input (all direct + indirect costs excluding G&A) |
Our indirect rate calculation guide walks through the math. Use the indirect rate calculator to model your specific numbers. The rates you establish now become your provisional billing rates until actuals replace them at year-end.
Provisional Billing Rate Setup
Provisional billing rates are the rates you use on invoices before your actual rates are finalized. FAR 42.704 governs how these rates work. For new contractors without historical data, provisional rates are based on your forward pricing proposal: your best estimate of what costs will look like over the contract performance period.
Two critical rules for provisional rates. First, document your basis of estimate. A spreadsheet showing how you calculated each rate, with supporting assumptions, is the minimum. Second, update your provisional rates when actuals deviate materially from estimates. Running six months at a provisional overhead rate of 80% when your actual rate is 120% creates a cash flow crisis at true-up time.
Phase 4: Validation and Readiness (Days 61 to 90)
The final 30 days are about testing every system you built in the first 60. By the end of month three, your books should produce the reports a DCAA auditor would request, and the numbers should hold up under scrutiny.
Self-Audit Checklist
Run through each item below. Every “no” answer represents a gap that will surface in an audit.
| Checkpoint | Pass/Fail Test |
|---|---|
| Cost-by-contract report | Pull a report showing all costs charged to each active contract. Every dollar must trace to either a direct charge or an indirect allocation. |
| Indirect rate calculation | Calculate your actual fringe, overhead, and G&A rates from the first two months of data. Compare to your provisional rates. Variance over 10% requires investigation. |
| Timekeeping compliance | Spot-check 10 random timesheets. Confirm daily entry, correct charge codes, supervisor approval, and audit trail for any corrections. |
| Unallowable cost screening | Review all expenses booked in months one and two. Confirm no unallowable costs (FAR 31.205) contaminate your indirect pools. |
| Policy documentation | Confirm all five written policies exist, are signed, and are dated. Ask two employees to describe the timekeeping policy. Their answers should match the written document. |
| Incurred cost data readiness | Confirm your system produces the data needed for Schedule H (direct costs by contract) and Schedule B (indirect rates) of the Incurred Cost Submission. |
SF 1408 Pre-Award Readiness
If your contract requires a pre-award accounting system survey, the government sends DCAA to evaluate your system against the SF 1408 criteria. All 14 criteria in Section II of the SF 1408 must receive a “yes” determination. A single “no” results in an inadequate system finding, which delays or blocks contract award.
The self-audit checklist above maps directly to the SF 1408 evaluation areas. If you passed every checkpoint, you are ready for a pre-award survey. If you did not, you know exactly where to focus before the auditor arrives.
The Cost of Getting This Wrong
Contractors who skip this checklist pay for it later. The numbers are consistent across our client base and industry data.
- Billing withholding: A significant deficiency finding under DFARS 252.242-7006 typically results in 5% to 10% payment withholding until the deficiency is corrected. On a $2M contract, that is $100,000 to $200,000 in delayed cash flow.
- Corrective action costs: Rebuilding a non-compliant accounting system after an audit finding costs three to five times more than building it correctly from the start. We have seen corrective action plans run $30,000 to $75,000 for small contractors.
- Lost follow-on contracts: An inadequate accounting system finding goes on record. Prime contractors check this before awarding subcontracts. Contracting officers check it before awarding new contracts. One finding blocks future revenue.
Frequently Asked Questions
How long does it take to set up a DCAA-compliant accounting system?
A complete setup takes 60 to 90 days when done correctly. Phase 1 (chart of accounts, timekeeping) takes two weeks. Policies and controls take another two weeks. Indirect rate structure and billing setup fill month two. Month three is validation and self-audit. Rushing the timeline increases the risk of gaps that surface during a DCAA audit.
Do I need DCAA compliance for a firm-fixed-price contract?
Firm-fixed-price contracts carry the lowest DCAA audit risk, but compliance still matters. If your FFP contract is CAS-covered (over $7.5M for full CAS, $2M for modified CAS), you must meet Cost Accounting Standards regardless of contract type. Even below those thresholds, building a compliant system now prepares you for cost-type contracts later.
What is the SF 1408 pre-award survey?
The SF 1408 is a standardized evaluation form DCAA uses to assess whether your accounting system is adequate for government contract cost accounting. It covers 14 criteria including cost segregation, timekeeping, indirect cost allocation, and internal controls. Passing the SF 1408 is a prerequisite for cost-type contract awards.
What accounting software works for government contractors?
QuickBooks (Desktop or Online) works for contractors under $10M in revenue when configured with a GovCon-specific chart of accounts. Larger contractors typically use Unanet, Deltek Costpoint, or Procas. The software matters less than the configuration: any system must separate direct, indirect, and unallowable costs and track expenses by individual contract.
What happens if I miss the 90-day setup window?
There is no formal 90-day deadline. The risk is practical: every invoice submitted without a compliant system behind it becomes a potential questioned cost. If DCAA audits your first year and finds the system was inadequate for the first six months, every cost charged during that period is subject to review and potential disallowance.
Build It Right the First Time
This government contract accounting checklist gives you the roadmap. The 90-day timeline is aggressive but achievable for contractors who prioritize compliance from day one. Every task maps to a specific regulatory requirement or audit checkpoint. Skip a task, and you are betting that DCAA will not ask about it. That is a bet contractors lose.
Amerifusion Bookkeeping is a CPA-managed firm built for government contractors at this exact stage. We configure your accounting system, write your policies, establish your indirect rate structure, and prepare you for the SF 1408 survey. The cost of professional setup is a fraction of the corrective action plan you will pay for later.
Start with the Compliance Readiness Check to see where your system stands today. Or review our GovCon accounting services and book a discovery call. The first 90 days set the trajectory for every contract that follows.
