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 pay for a corrective action plan they could have avoided. 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 indirect cost pools appropriate for your cost structure | Costs must go into the right pool from the start. Reclassifying them later is what auditors question. | FAR 31.203(c) |
| 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)(3) |
On pools: the three-pool model (Fringe, Overhead, G&A) is common practice for cost-reimbursement contractors, not a regulatory mandate. FAR 31.203(c) requires indirect costs to accumulate in logical cost groupings with due consideration of cost causation. Pool count and names are your choice.
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 one of the most frequently audited areas in government contracting. DCAA tests labor records through floor checks, and how far it goes depends on how reliable your timekeeping controls look [DCAA CAM 6-405.1]. A non-compliant timekeeping system does not get a warning. It gets a finding, and billing withholding follows.
DFARS 252.242-7005 applies only to contracts subject to the Cost Accounting Standards. 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. But 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)].
| 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 Manual 7641.90 (Nov 2023) Encl. 3, Section 3.c(4) |
| 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)(10) |
| Establish supervisor approval workflow | Time entries require supervisor review and approval before they feed into cost accumulation | DCAA CAM 6-405.2 |
| Confirm audit trail for corrections | DCAA looks for every correction to be initialed by the employee who made the original entry and by the approving supervisor. | DCAA CAM 6-405.2 |
| 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 |
Record the reason for each correction as well. Nothing requires it, and it makes the record far easier to defend.
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 evaluates whether written policies exist covering every area of cost charging [DFARS 252.242-7006(c); DCAA Manual 7641.90 (Nov 2023), Encl. 3, Section 3.c]. Verbal descriptions of how your company operates do not satisfy the documentation criteria auditors apply. A dated, signed document describing the method and the rationale does.
Week 3: Written Accounting Policies
| Policy | What It Covers | DCAA Audit Relevance |
|---|---|---|
| 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 compensation limits | 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 Statement | How you classify direct vs. indirect, allocation bases for each pool, consistency commitments | CAS 401 and CAS 402 apply to CAS-covered contracts |
Two notes on that table. The latest published executive compensation cap is $671,000 for CY2025, per DCAA 24-PSP-009(R). The CY2026 figure has not been released, so build the policy against CY2025 and revisit it when DCAA publishes. CAS 401 governs consistency in estimating, accumulating, and reporting costs; CAS 402 governs consistency in allocating costs incurred for the same purpose.
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. Retention requirements vary by record type under FAR 4.705. Most financial records, including accounts receivable and payable: 4 years. Time and attendance cards (timesheets): 2 years. Labor cost distribution cards: 2 years. The general records availability rule under FAR 4.703(a) runs 3 years after final payment, or the specific period in FAR 4.705 through 4.705-3, whichever expires first; see FAR 4.705-1 and FAR 4.705-2 for your categories. Those are floors, not targets. Keeping records longer than the rule requires is our own recommendation rather than a regulatory one, and it is cheap insurance when an audit arrives late.
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 cost-reimbursement contractors structure three indirect cost pools: Fringe, Overhead, and G&A. This is common practice in the industry, not a regulatory mandate. FAR 31.203(c) requires logical cost groupings appropriate to your cost structure. A small contractor with one contract and no facility costs might legitimately use two pools. Your specific structure should reflect how costs actually flow through your business.
| 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 (Overhaul 42.504) 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, signed and dated. Ask two employees to describe the timekeeping policy; answers should match the 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 15 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 figures below are our own observations from client work, not published benchmarks.
- Billing withholding, if the clause reaches you: A material weakness finding against the DFARS 252.242-7006 criteria triggers withholding under DFARS 252.242-7005 of 5% for one deficient business system and 10% for two or more. On a $2M contract that is $100,000 to $200,000 in delayed cash flow. Before you panic, note the qualifier from Week 2: that clause reaches only CAS-covered contracts, and small businesses are exempt from CAS at any value [48 CFR 9903.201-1(b)(3)], so a contractor reading a first-90-days checklist is usually outside it. If it does reach you, an acceptable corrective action plan filed within 45 days drops the withhold from 5% to 2% [DFARS 252.242-7005(e)(2)], turning that $100,000 into $40,000.
- 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. The corrective action plans we have worked on have run roughly $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, Cost Accounting Standards apply regardless of contract type. CAS coverage thresholds changed significantly under the FY2026 NDAA. Even below CAS 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 15 criteria including cost segregation, timekeeping, indirect cost allocation, internal controls, and whether the system is actually running. 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.
