The Skinny on Accounting System Administration – DFARS 252.242-7006

The accounting System is one of the Six Systems defined in the Business Systems Rule, which may be incorporated into a contract with DFARS Clause 252.242-7005 (c). The clause states: “The contractor shall establish and maintain acceptable business systems in accordance with the terms and conditions of this contract.”

When is this important to a Federal Contractor?

The Accounting System is required for cost reimbursement, incentive fee, T&M or labor hour contracts, or for fixed price work with progress payments.  In other words, for any contract that is receiving a payment on specific costs incurred or other measurable factors.  

Accounting System Requirements:

This is the first compliant system a contractor is required to have for Government contracts of the types identified above.  And to be compliant, the system must follow all laws and regulations.  The Accounting system and cost data must be reliable.  Standard processes and internal controls must be in place, followed, working, and monitored, to reduce the risk of misallocations and mis-charging of costs.  Also, the costs must be collected, allocated or otherwise recorded in a consistent manner with the costs billed on contracts.  

Prior to awarding the types of contracts listed above, the accounting system must be evaluated against the 18 criteria outlined in the DFARS clause.  Often, the Defense Contract Audit Agency is assigned the audit of the Accounting System and an SF1408 (Standard Form 1408) is completed, documenting the compliance with each of the criteria.

What’s the point?

The accounting system criteria represent the Government’s standardization to improve consistency and accuracy.

The 18 criteria can be combined into 4 groups of processes intended to culminate in compliant practices:

1. The setup of the accounting system and related processes (Criteria 1, 2, 3, 4, 5, 9, 10, & 14)

2. A properly maintained and working system for which processes are consistently followed (Criteria 6, 7, 8, & 16), and

3. Ensuring correct collection, accumulation and application of cost, accurately represent those billed to a government contract. (Criteria 9, 10, 11, 12, 13, 15, & 17)

*    BONUS – That the company follows all the criteria and GAAP 😊  (Criteria 18)

It’s easy enough to read the list of criteria. The difficult part is knowing how the government tests compliance with these criteria, what documentation is required, and how to identify and correct deficiencies.  

Best practices include proactively assessing your Accounting System and processes to ensure your compliance with the DFARS criteria before you’re subject to audit!

deClermont Consulting can provide the assessment of compliance with accounting system criteria, help correct or enhance accounting practices, and prepare supporting documentation for an accounting system audit.  Reach out with any questions or for more information on the process.