Winning government contracts is challenging, but maintaining compliance after you win them can be even more challenging.
That’s where having a DCAA compliance checklist becomes essential.
Many government contractors focus heavily on proposal preparation and contract execution but overlook the accounting systems, policies, and controls needed to support government contract requirements.
For contractors pursuing certain types of government contracts, those systems may be evaluated before an award is made. The SF 1408, Pre-Award Survey of Prospective Contractor Accounting System, provides a useful roadmap for understanding what an adequate government contracting accounting system should be designed to do. It addresses areas such as proper segregation of direct and indirect costs, identification and accumulation of direct costs by contract, labor timekeeping, indirect cost allocation, exclusion of unallowable costs, and the ability to produce required financial information.
The Defense Contract Audit Agency (DCAA) uses the SF 1408 criteria when performing a pre-award accounting system survey to evaluate whether a prospective contractor’s accounting system is suitably designed for the type of government contract being considered.
Even if you are not currently undergoing a pre-award survey, the SF 1408 can serve as a valuable reference point when assessing whether your accounting processes are ready to support government contracting requirements.
While every contractor’s situation is unique, there are several core areas every government contractor should review regularly.
What Is DCAA Compliance?
DCAA compliance refers to maintaining accounting, timekeeping, and financial management systems that align with federal contracting requirements.
The goal is to ensure:
- Costs are properly tracked
- Billing is accurate
- Indirect rates are supported
- Government funds are appropriately managed
Compliance is an ongoing process — not a one-time event.
Read More: Why DCAA Compliance Matters
Key Components for Your DCAA Compliance Checklist
Maintain DCAA-Compliant Timekeeping
Timekeeping is one of the most frequently reviewed areas during DCAA evaluations.
Employees should:
- Record time daily
- Record all hours worked (even hours not for government project)
- Submit timesheets promptly
- Certify their own hours
Supervisors should:
- Review and approve time records
- Monitor corrections
- Ensure changes are documented
Most importantly, all changes should create a clear audit trail.
Read More: 10 Top Requirements for DCAA Compliant Timekeeping
Track Direct and Indirect Costs Separately
Contractors must clearly distinguish between direct and indirect costs.
Direct costs are specifically associated with a contract and/or task order, such as:
- Direct labor
- Contract-specific travel
- Materials purchased for a project
Indirect costs support overall operations and may include:
- Payroll taxes
- Employee benefits
- Accounting expenses
- Legal fees
- Administrative salaries
Proper segregation is one of the foundational elements of DCAA compliance.
Read More: Understanding DCAA Indirect Costs and Rate Calculations
Allocate Labor Correctly
Payroll allocation is another common compliance issue. Labor costs should be assigned based on actual time worked. This becomes particularly important when employees work across multiple contracts or cost objectives.
The allocation process should be documented and consistently applied.
Calculate and Monitor Indirect Rates
Government contractors should regularly monitor:
- Fringe rates
- Overhead rates
- G&A rates
Indirect rates affect:
- Proposal pricing
- Contract profitability
- Billing accuracy
Waiting until year-end to calculate rates can create surprises. Regular monitoring provides better visibility and supports stronger decision-making.
Review FAR Part 31 Compliance
FAR Part 31 governs cost allowability.
Contractors should ensure that:
- Unallowable costs are identified
- Cost pools are structured appropriately
- Accounting systems support required reporting
Failure to properly identify unallowable costs can create significant compliance issues.
Prepare for Incurred Cost Submissions
Contractors with cost-reimbursable contracts may need to submit an annual Incurred Cost Submission (ICS).
Preparation should include:
- Reconciled financial statements
- Indirect rate calculations
- Labor distribution records
- Supporting schedules
Strong recordkeeping throughout the year makes this process significantly easier.
Read More: Decoding the Incurred Cost Submission: A Small Contractor Guide
Evaluate Your Accounting Software
Your accounting system should support:
- Job costing
- Cost segregation
- Labor allocation
- Detailed reporting
Compliance is about processes, not software alone, but the right system makes compliance significantly easier.
Read More: Choosing the Right Government Accounting Software
Common Signs of Compliance Risk
You may need to strengthen your DCAA compliance if:
- Timesheets are completed weekly instead of daily
- Employees estimate hours worked
- Direct and indirect costs are mixed together
- Indirect rates are only calculated annually
- Labor allocations are not documented
- Financial reports cannot support contract-level analysis
Addressing these issues proactively can reduce audit risk and improve operational visibility.
Read More: DCAA Audits: Red Flags
How Bay Business Group Helps Government Contractors
At Bay Business Group, we provide outsourced accounting and fractional CFO services specifically designed for government contractors.
We help contractors:
- Implement DCAA-compliant accounting systems
- Establish compliant timekeeping procedures
- Calculate indirect and wrap rates
- Prepare for audits and incurred cost submissions
- Improve financial visibility and contract profitability
Compliance keeps you eligible. Strong financial management helps you grow.
Take the Next Step With Bay Business Group
Whether you’re preparing for your first government contract or strengthening an existing accounting system, DCAA compliance deserves ongoing attention.
If you’re unsure whether your systems meet current requirements, click here to schedule a free 30-minute consultation with Bay Business Group. Our team can help you build a compliance framework that supports both audit readiness and long-term growth.