What is an Adequate Accounting System? 10 Questions to Determine if Your Accounting System is Adequate for Government Contracts
In many cases, having an “adequate accounting system” is an integral part of successfully winning and performing on Federal contracts. Many companies find it challenging to determine when accounting system requirements are triggered and how to navigate obtaining a determination of adequacy.
Our clients and prospects unanimously have the same questions. Since these questions are so prevalent, we thought we’d answer them here for you.
If you have additional questions about adequate accounting systems or need to know if your system is approved, contact us asap and we’ll be happy to help.
Top 10 Adequate Accounting System Questions
1. When is a contractor required to have an adequate accounting system?
The requirement for an adequate accounting system depends on the type of Federal contract you will be or have been awarded. FAR 16.301(3) requires the contractor to maintain an adequate accounting system for determining costs applicable to the contract or order for contracts awarded on the basis of cost, such as:
- Cost-reimbursement contracts
- Cost-sharing contracts
- Cost-plus-incentive-fee
- Cost-plus-award-fee
- Cost-plus-fixed-fee
- Fixed Price or Time & Materials (T&M) contracts with cost reimbursable line items
2. As a small business contractor, am I required to have an adequate accounting system?
The requirement for an adequate accounting system depends on the type of contract award not the contractor size.
If your organization has been awarded a type of contract listed in Question 1, you are required to have an adequate accounting system. Also, if the organization is responding to a Request for Proposal (RFP) for a government contract awarded based on cost, then an adequate accounting system will likely be an RFP requirement.
3. As a subcontractor, am I required to have an adequate accounting system, and who is responsible for monitoring the adequacy of my accounting system?
Whether an adequate accounting system is required will ultimately depend on the type of prime or subcontract you are awarded, and whether or not it is based on cost.
Prime contractors typically “flow down” the requirement for an adequate accounting system to their subcontractors if awarding a contract based on cost. FAR 16.301(3) requires the contractor to maintain an adequate accounting system for determining costs applicable to the contract or order for contracts awarded on the basis of cost.
Further, prime contractors are responsible for managing subcontracts, per FAR 42.202(e)(2).
4. Who is responsible for determining and monitoring the adequacy of my accounting system for prime contracts?
The Contracting Officer (CO) or Administrative Contracting Officer (ACO) is responsible for determining if the contractor has an adequate accounting system, if required by FAR 16.301. The Defense Contract Audit Agency (DCAA) serves as the technical advisor in making this determination and is most often called in to perform a pre-award or post-award accounting system review at the request of the ACO or CO.
5. May I request DCAA review my organization’s accounting system?
A contractor cannot request that DCAA perform a service. Only a CO or ACO can make the request.
A contractor can, however, engage in discussions with their ACO or an individual CO to request that they trigger a DCAA audit, but ultimately they will only trigger the audit if the CO determines there is a need as DCAA resources are limited.
6. How does a contractor obtain approval of its accounting system in order to respond to an RFP?
If a contractor is a likely “contender” for an award based on cost, the CO will typically request DCAA perform a “pre-award” accounting system review. In many cases, contractors are permitted to submit “pre-award” accounting system reviews performed by 3rd party CPA firms like us.
7. Do I have access to the results of DCAA audits?
The CO who requests the accounting system review by DCAA receives the results.
In most cases, the CO will make the report available to the contractor to enable either corrective actions or future use of the adequacy determination.
8. Is my organization excluded from competition if an RFP requires an adequate accounting system and DCAA has not reviewed my system?
Typically, the CO will request a pre-award accounting system review for contractors that are down selected.
For this reason, it is important for contractors to fully disclose the status of their accounting system and ensure they are well prepared for a pre-award review upon submission of a proposal.
There is also the option for a third party, such as CPA Department, to perform the pre-award accounting system assessment and submit the results to satisfy proposal requirements.
9. Can I have a third party review the system in lieu of DCAA?
The Federal government has not recognized third party reviews in lieu of DCAA Assessments. However, the government has explicitly stated in solicitations it allows the review by third parties to satisfy RFP requirements, thus indicating that the contractor is eligible to receive a contract award based on cost.
The benefit of a third-party assessment is twofold:
(1) to meet RFP requirements
(2) to prepare contractors for the ultimate review by DCAA to ensure the contractor is prepared to pass the review.
In our experience, third party reviews are also accepted by prime contractors as evidence of an acceptable accounting system for award of subcontracts.
10. How long is the adequacy determination valid?
The system review is typically valid for three years or until a material change occurs in the system. Typical material changes would include a change in accounting software, while immaterial changes would include the addition of a new overhead pool for additional contract work or a minor revision to accounting policies and procedures.
Contractors should completely disclose all changes in the accounting system when submitting for provisional billing rates and in Schedule M of the annual incurred cost submission to ensure full disclosure.