Building a strong foundation: Understanding SF-1408 accounting system requirements

Government contractors must adhere to specific accounting system requirements to help achieve accurate cost reporting and contract compliance. The SF-1408, a standard form used by the Defense Contract Audit Agency (DCAA), outlines these requirements. Understanding and meeting these standards allows contractors to avoid potential penalties and maintain their reputation. 

Federal contracting regulations, such as the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS), require government contractors to maintain an adequate accounting system to qualify for award of flexibly priced contracts, including cost-reimbursement contracts. An adequate system supports the accurate recording and allocation of all direct and indirect costs.  

To evaluate whether a contractor's accounting system meets the required standards for award of these contracts, the government uses the criteria included in the SF-1408, Pre-Award Survey of Prospective Contractor Accounting System. 

Why SF-1408 adherence is important 

The SF-1408 is a critical tool for government contracting because: 

• Accurate cost reporting. It supports contractors in accurately reporting costs to the government, which helps in preventing overcharging and fraud. 

• Contract compliance. By adhering to SF-1408 Requirements, contractors demonstrate their commitment to contract terms and conditions. 

• Efficient audits. Compliant accounting systems streamline audits, reducing delays and administrative burdens. 

• Risk mitigation. Proper accounting practices helps minimize the risk of disputes, claims, and potential contract terminations. 

What are the key SF-1408 requirements?  

The SF-1408 outlines various accounting system criteria, such as: 

• Segregation of costs. Contractors must distinguish between direct costs (directly attributable to a specific contract) and indirect costs (shared across multiple contracts). 

• Cost allocation. Indirect costs must be allocated to contracts using logical and consistent methods. 

• Timekeeping and labor distribution. Accurate timekeeping and labor distribution systems are essential to track employee effort and charge it to the appropriate cost objectives. 

• General Ledger control. The General Ledger should provide a comprehensive overview of financial transactions and support proper cost accumulation. 

• Interim cost determination. Contractors must regularly determine costs charged to contracts to maintain accurate records and facilitate timely billing. 

The SF-1408 requirements are rooted in the FAR and DFARS. These regulations provide the overarching framework for government contracting and include specific references to accounting system standards. Understanding and complying with the SF-1408 requirements enables government contractor to maintain accurate financial records, streamline audits, and help minimize the risk of disputes. Investing in a robust accounting system that meets these standards is essential for long-term success in government contracting. 

In recent years, SF-1408 requirements have been increasingly incorporated into Government-wide Acquisition Contracts (GWAC), either as additional evaluation criteria or as a prerequisite to submit a bid. Contractors aiming to pursue these opportunities should plan accordingly. While the DCAA typically conducts SF-1408 reviews, limited resources have led the government to accept third-party reviews to fulfill the requirement for an approved accounting system in many GWAC solicitations. 

As the Alliant-3 GWAC proposal deadline approaches on February 3, 2025, prospective bidders must verify they have a suitable accounting system and demonstrate their ability to manage flexibly priced contracts. Government contractors still have the opportunity to evaluate their accounting systems to meet the SF-1408 adequacy requirements, ensuring adequate cost reporting and contract compliance. 

How can BDO assist? 

BDO's Government Contracting professionals possess extensive experience in evaluating government contractor accounting systems. They offer skilled guidance to ensure that a company's accounting system complies with the SF-1408 standards as outlined by the FAR and DFARS.