April 23, 2025
By Paul Calabrese, Principal and Jennifer Arce, Principal
Unlike fixed-price contracts—where the contractor bears the risk and compliance burden is lighter—cost-reimbursable contracts impose a high level of scrutiny and administrative oversight. Contractors must justify every expense, comply with strict rules under FAR 31.2, and prepare for continuous DCAA reviews. With this in mind, it is important for contractors to understand the SF 1408 Checklist and seek out specialized accounting tools like Unanet and expert consulting to meet the government’s rigorous compliance requirements.
The Government Compliance Landscape
Fixed price contracts are almost always the preference of the US government, as the contractor assumes all the risk with less government oversight and predictable outcomes. When the government awards a cost reimbursable contract the result to the contractor involves continuous audits, reviews of allowable cost, justification of detailed expenses, and increasing administrative workload that results in significant compliance requirements. For the government, these types of contracts end up costing them more by virtue of ongoing oversight. Typically, the US government awards cost reimbursement contracts when there are uncertain projects where defining upfront costs becomes difficult such as research and development or Phase 3 of a Small Business Innovation Research (SBIR) effort.
When a contracting officer is uncertain if a contractor has been awarded a cost reimbursement contract per FAR 9.106-1(a), the contracting officer will request a review of a contractor’s cost accounting system as prescribed in FAR 53.209-1(f). The cognizant audit agency will use a checklist form called the SF 1408 “Pre-Award Survey of Prospective Contractor Accounting System”. Within the Department of Defense, the Defense Contract Audit Agency (DCAA) performs these reviews.
The SF 1408 form is used to assess whether a contractor’s accounting system is adequate for cost-reimbursement type contracts. The government uses a checklist to audit 14 different areas using the criteria listed on page 2. The last item on page 2 has four possible responses to answer the question as to whether the accounting system is in full operation. The first page provides a Yes / No statement with an optional narrative as to whether the “prospective contractor’s accounting system is acceptable for award of prospective contract.”
The SF 1408 Evaluation Checklist
The SF 1408 evaluation checklist identifies the following critical compliance areas. Many government contractors employ Unanet project cost accounting software to address each of these DCAA requirements.
✔️Ensure the accounting system segregates “direct” from “indirect” costs and identifies the accumulation of direct costs by contract. If required, tracking direct costs by contract line item and by units. Unanet has the capability to segregate costs by creating both direct and indirect projects that serve as cost accumulators. These projects then allocate expenses to the general ledger based on predefined expense types and posting configurations within the system. For example, when a subcontractor submits a timesheet for a direct project, the system is configured to automatically post their time to the appropriate general ledger account for direct subcontractor costs.
✔️The logical and consistent accumulation of indirect costs to intermediate (service centers like fringe benefits) and final cost objectives (contract). Unanet can be configured to support an unlimited number of cost pools and service centers. Service center allocations can be processed either monthly or on a year-to-date basis, depending on organizational requirements. Each project created within the system is assigned to the appropriate cost pool group to ensure accurate cost tracking. All cost allocations are executed seamlessly on the back end with a single system-generated action, streamlining the overall process.
✔️Accumulation of cost under general ledger control and at least monthly posting of costs to a contract in the general ledger. Costs can be posted to the general ledger at any time during the month via subsidiary ledgers. Labor and expense reports can be posted once they have been approved and completed. Accounts payable and journal entries are posted upon the postdate entered in each voucher.
✔️Segregating FAR Part 31.2 unallowable expenses from claimed contract cost. Unallowable costs are captured through a designated unallowable project and subsequently recorded in the appropriate unallowable accounts within the general ledger.
✔️A timekeeping system that identifies employees’ labor charges to either intermediate or final cost objectives. Unanet’s comprehensive timesheet system is highly customizable to meet the specific needs of each organization. Charging permissions can be managed at the project or task level, allowing precise control over individual assignments. Each user is assigned to a project along with a corresponding labor category. Additionally, detailed restrictions—such as allowable date ranges and maximum hours—can be easily configured on a project or task basis.
✔️A labor distribution system that charges direct and indirect labor to the appropriate cost objective, such as direct labor to a contract, bid and proposal or independent research and development to a project, paid absence, or indirect labor to an overhead, general and administration, material handling or subcontract administration cost pool. All projects and their respective people assignments are set up on the back end to identify the final cost objective for the time charged. Once time sheets are approved and completed the labor cost post is performed and all labor charges are posted to the general ledger.
✔️Other criteria address the segregation of pre-production and production cost, limitation of cost and payments, progress payments, and reliable data for the use in follow-on acquisitions.
Compliance Beyond SF 1408 — DFARS 252.242-7006
Important items not addressed in the SF 1408 checklist that are addressed in the Defense Department’s Accounting System Administration, DFARS 252.242-7006 include:
✔️Approval and documentation of adjusting entries. Unanet supports role-based journal entry processing, allowing one user to create and submit a journal entry while a separate user performs the posting. When required for audit purposes, a detailed report can be generated that includes the journal entry itself, the identity of the user who created and/or submitted it (with corresponding date and time stamps), and the user who posted the entry, also with full timestamp details. This ensures compliance with audit requirements.
✔️Management reviews and internal audits. Predefined reports can be saved to a user’s dashboard and executed at any time to retrieve the necessary data. This functionality enables management and internal auditors to access and review information at their convenience.
✔️Billings that reconcile to the general ledger which comply with contract terms. Unanet offers a robust invoicing system that leverages data from the general ledger, time sheets, and expense reports to generate comprehensive invoices. The invoicing process is fully customizable to meet specific project requirements and supports multiple billing schedules. Invoices can also be generated using custom time periods to accommodate unique invoicing needs.
✔️Cost Accounting Standards compliance or GAAP (GAAP is in the SF 1408).
Compliance with Cost Accounting Standards (CAS)
Unanet is designed around project-based accounting principles, enabling organizations to effectively segregate, accumulate, and allocate costs in accordance with CAS.
Compliance with Generally Accepted Accounting Principles (GAAP)
Unanet provides a financial framework that aligns with GAAP standards through the following capabilities:
- Accrual-Based Accounting. The system supports accrual accounting, ensuring revenues and expenses are recognized in the correct accounting periods.
- Revenue Recognition Methods. Unanet accommodates various GAAP-compliant revenue recognition methods, including percent-complete and time-and-materials billing.
- Integrated General Ledger. All financial transactions are recorded within a fully integrated general ledger, supporting accurate reporting and seamless reconciliation.
- Audit-Ready Documentation. Each financial transaction—such as journal entries, timesheet approvals, and expense reports—is documented with user and timestamp data, fulfilling GAAP documentation and audit requirements.
- Role-Based Security and Internal Controls. Granular role-based access controls help enforce internal control policies and reduce risk, supporting overall financial integrity in accordance with GAAP.
Sound Internal Control Environment
Unanet supports your organization’s internal control framework.
Conclusion
Cost reimbursement contracts contain many more compliance requirements than fixed price or time and material awards. Contractors obtaining their first cost reimbursement contract need to be ready. Your contracting office may request a DCAA review of your cost accounting system using the SF 1408 evaluation checklist.
Unanet cost accounting software can address every SF 1408 and DFAR 252.242-7006 accounting system criteria and reduce your accounting department by at least 1 FTE. Superior to Quick Books software, Unanet offers automated, integrated labor distribution and indirect rates, DCAA ICE template, CPFF invoicing, integrated electronic timekeeping, document retention with each general ledger transaction, determination, and documentation of JTR and GSA travel per diems, and more.
In addition to employing the right accounting tools, it is important to work with government contracting experts who are skilled at working with DCAA auditors. GRF offers former DCAA auditors who help contractors with managing and preparing for a DCAA audit of their cost accounting system.
Contact Us
GRF CPAs & Advisors offers a deep bench of expertise in the government contracting sector including accounting system selection and implementation. With subject matter experts addressing all aspects of preparing for a DCAA SF 1408 review and bolstering your cost accounting system with Unanet software, as well as DCAA-FAR-CAS regulatory and oversight compliance, GRF provides tailored audit, tax and advisory services that address the unique challenges and opportunities faced by contractors.
Our team of seasoned professionals is committed to delivering comprehensive solutions. By leveraging GRF’s experience and local market knowledge, government contractors can confidently navigate the complexities of the acquisition process and achieve their strategic goals.
