Preparing Your Accounting System for Government Contract Success

For architecture, engineering, and other professional services firms, pursuing government contracts isn’t just about winning the bid—it’s about passing the pre-award audit. Non-compliance with government accounting standards is not optional; it’s a non-starter that costs time, resources, and reputation.

One of the most critical steps in this journey is ensuring your accounting system meets the requirements outlined in the SF 1408 Pre-award Survey of Prospective Contractor Accounting System. This is where a FAR Readiness Assessment becomes invaluable.

What Is a FAR Readiness Assessment?

A FAR Readiness Assessment is a comprehensive evaluation of a contractor’s accounting system to determine compliance with:

• SF 1408: The Pre-award Survey of Prospective Contractor Accounting System checklist is used by the government to determine if your system is adequate before a contract is awarded.
• Federal Acquisition Regulation (FAR) Part 31: The rules that determine which costs are allowable, allocable, and reasonable when billing the government.
• Cost Accounting Standards (CAS): A set of rules ensuring consistency in how contractors measure, assign, and allocate costs on government contracts.

This assessment is a prerequisite for contractors proposing or performing work on flexibly-priced contracts, such as time-and-materials (T&M) or cost-reimbursable contracts. These contract types require a higher level of accounting rigor to ensure that costs billed to the government are allowable, allocable, and reasonable.

Why It Matters

The SF 1408 survey is not just a formality; it’s a gatekeeper. Contracting officers use it to determine whether your accounting system is adequate for government work. A failed survey can delay or disqualify your firm from contract awards.

Even if you’re not currently pursuing federal contracts, many state and local agencies, such as Department of Transportation (DOTs), have similar requirements. For example, Caltrans (CA DOT) requires contractors to follow detailed accounting and audit guidelines that closely mirror federal standards, even if they don’t explicitly reference SF 1408.

12 Key Areas of Evaluation

The SF 1048 checklist includes specific criteria that must be met for an accounting system to be deemed adequate. Below is a breakdown of each requirement and what it means for your firm:

1. Compliance with GAAP

Your accounting system must follow Generally Accepted Accounting Principles (GAAP), ensuring consistency, transparency, and comparability in financial reporting. Your system must record revenue when earned and expenses when incurred—not when cash changes hands.

2. Segregation of Direct and Indirect Costs

The system must clearly distinguish between direct costs (e.g., labor and materials directly tied to a project) and indirect costs (e.g., overhead, administrative expenses).

3. Identification and Accumulation of Direct Costs by Contract

Each contract must have its own cost ledger, allowing for accurate tracking of all direct costs associated with that specific project.

4. Logical and Consistent Allocation of Indirect Costs

Indirect costs must be allocated using a consistent methodology, such as fringe or general overhead rates, applied to all contracts.

5. General Ledger Control

All costs must be recorded in a general ledger governed by policies, procedures, and internal controls to protect system integrity and ensure accurate reporting.

6. Timekeeping System

A compliant timekeeping system must track labor by project or cost objective. Employees must record time daily, and supervisors must review and approve timesheets.

7. Labor Distribution System

Labor costs must be distributed to the appropriate cost objectives (direct or indirect) based on the timekeeping data, ensuring accurate labor cost allocation.

8. Interim Determination of Costs

The system must allow for at least monthly posting of costs to contracts, enabling timely financial reporting and project monitoring.

9. Exclusion of Unallowable Costs

Costs that are unallowable under FAR Part 31, such as lobbying, alcohol, and certain entertainment expenses, must be identified and excluded from billings to the government.

10. Identification of Costs by Contract Line Item

For contracts that require it, the system must be able to track costs by specific contract line items (CLINs), supporting detailed invoicing and reporting.

11. Segregation of Preproduction Costs

If applicable, preproduction costs must be tracked separately from production costs to comply with contract-specific requirements.

12. Billings Based on Costs Incurred

The system must support billing based on actual costs incurred, rather than on estimates or fixed amounts, for cost-type contracts.

Common Challenges for AE Firms

Many AE firms operate on systems designed for commercial clients, which may not meet government requirements. Common pitfalls include:

• Using cash-basis accounting
• Inadequate timekeeping systems
• Commingling direct and indirect costs
• Lack of internal controls or documented policies

These issues can lead to failed audits, disallowed costs, and reputational damage. One way to address these issues before they become problems is by conducting a FAR Readiness Assessment.

Applying our deep expertise in government compliance and the AE industry, SN has developed a FAR Readiness Assessment designed to help your firm:

• Understand and meet the requirements of SF 1408, FAR 31, and CAS
• Identify and correct gaps in your accounting system
• Prepare for audits and pre-award surveys with confidence
• Improve your competitiveness for federal, state, and local contracts

Next Steps

Whether you’re preparing for your first government contract or seeking to strengthen your compliance posture, we’re here to guide you every step of the way.

Ready to ensure your system is audit-ready and position your business for sustained growth? Let’s talk about how our Government Contracting Advisory team can help your firm accelerate success in the public sector.