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January 20, 2023

What is the SF1408 and the Pre-award Survey - Get Prepared

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DCAA Overview

Just in case you are completely new to Government Contracting, let's quickly level set on the mission of the Defense Contract Audit Agency (DCAA). Their primary function is to perform contract and financial audits for agencies that are responsible for acquisition and contract administration for the US Government. DCAA audits ONLY government contractors like you. They conduct these audits in accordance with the Generally Accepted Government Auditing Standards (GAGAS). The principles that GAGAS embodies are unbiased audit conclusions based on facts. The DCAA website is an excellent resource for those that are new to government contracting or those that have been at it for quite some time. We recommend a visit to the website and more specifically the "Checklists and Tools" under the "Customers" tab (DCAA Checklist and Tools) then select Pre-award Accounting System Adequacy Checklist to help you more thoroughly prepare for impending audits. If the checklist appears daunting don't worry we have industry experts available to assist you.

Pre-Award Accounting System Survey - SF1408

With all that said, let's focus on the topic of this blog, which is the Pre-Award Accounting System Survey (SF1408). The Accounting System Survey is considered a "pre-award audit" and it is necessary for the award of any Cost Type contract. For more information about contract types, see the Major Government Contract Types Blog. Below is an excerpt from the DCAA Letters to Congress about Pre-Award Audits:

Pre-Award Audits. Pre-award audits determine whether the design of a contractor's accounting system is acceptable, which is a necessary condition for awarding cost-type contracts. To better meet the needs of buying commands, DCAA prioritized these audits and developed tools to assist both contractors and auditors. As a result, DCAA has reduced the number of days to complete pre-award audits going from approximately 120 days in FY 2012 to about 60 days in FY 2016. Those measures, combined with effective communication between audit staff, contracting officers, and contractors, has allowed us to more quickly identify system deficiencies, provide workable solutions, and reduce the time between solicitation to award. Additionally, a part of our outreach to small businesses focuses on the necessary components of an acceptable accounting system, which we feel also contributed to this success.

The "Pre-Award Survey (SF1408)" is conducted prior to award and is contract specific. It results in an opinion that the system is "acceptable" for use on the contemplated contract. It should be noted that this is NOT a true audit because it does not look at any actual costs - only the system's capabilities. It is referred to as a "Survey" in the document and it is considered a "review" in auditor terminology. It can, and often is, done on a system that is not yet implemented based on the software capabilities and pro forma company policies and procedures.

The Survey is a Pre-Award Survey known as Standard Form (SF) 1408 which is asking questions about your accounting system. Below are some of the inquiries of the form:

  • Is the accounting system in accordance with GAAP?
  • Accounting System provides for:
    • Proper segregation of direct and indirect costs
    • Identification and accumulation of direct costs by contract
    • Method for allocation of indirect costs
    • Have a written, practiced, and demonstrable timekeeping system or policy in place
    • Show distribution of labor costs among accounts and jobs
    • Segregation of unallowable costs
    • Accumulation of costs under General Ledger Control
    • Issue reports periodically and on-demand
  • Accounting System provides financial information
    • Required by contract clauses concerning limitation of (cost, funds)(FAR 52.232-20 and 22) or limitation of payments (FAR 52.216-16)
    • Required to support requests for progress payments
  • Is the accounting system designed to have reliable and accurate data?
  • Is the accounting system fully operable?

Please pay special attention to the limitation of cost, payments, and limitation of payments clauses as many accounting systems can not support these requirements and they expose your company to substantial financial risk. If you do not notify your contracting officer in a timely manner the government has NO obligation to pay your claim i.e. your invoice.

This overall process can be tricky for new government contractors or those that have just been awarded their first cost-type contract, and it is highly suggested that you have the right processes and tools in place to assure success. If you are uncomfortable with taking this on yourself, please contact AtWork Systems, as we have experts that can assist you every step of the way. This is a great example of properly investing upfront to ensure the success of your contract/project as well as your company.

When prospective government contractor submits a proposal to the DoD, they are frequently asked to prepare and submit a pre-award accounting survey: Standard Form 1408 Accountancy System Survey (SF 1408).

As a rule, the federal government requires contractors and subcontractors to be good stewards of its funds and achieve cost objectives. This is because they are essentially spending taxpayer dollars and therefore operate under a fiduciary responsibility manner. The Department of Defense requires contractors to maintain a FAR Part 31 compliant accounting system, especially when a cost-reimbursement contract may be awarded.

The SF 1408 is a self-certification form used to document your system adequacy. You will represent to the federal government that your contract accounting is or will be maintained in compliance with FAR 48 CFR - Federal Acquisition Regulation (FAR) Part 31 and the DFARS.

To complete form SF 1408 successfully and position yourself for a DOD contract award, you must show that an adequate accounting system is in place and can meet DOD's accounting system requirements for contract accounting. 

If you have gaps in your accounting system, you must include a detailed plan with implementation dates for bringing your system into compliance.

Once completed, the SF 1408 accounting system survey is returned to your prospective contracting officer who will then turn the form over to the Defense Contract Audit Agency (DCAA) and request an initial Accounting System Review.

A QUICK LOOK AT THE DCAA ACCOUNTING SYSTEM REVIEW

The DCAA Accounting System Review is basically an audit of a contractor's accounting system and internal controls to ensure compliance with FAR Part 31. This includes everything from tracking direct and indirect costs to timesheet preparation policies and labor distribution systems. These audits are typically done on-site by a DCAA auditor, though during the pandemic, we saw quite a few done virtually.

If you're a smaller, new government contractor - your goal is to be categorized as "low risk", so passing this initial audit without findings is critical.

WHAT ARE THE RAMIFICATIONS OF ACCOUNTING SYSTEM AUDIT FINDINGS?

If you have submitted a federal contract proposal and can not demonstrate that you are maintaining a compliant accounting system, you may be denied the award or required to correct the defective items prior to reconsideration.

If you've been awarded a federal contract and can't pass an Accounting System Audit, the DCAA can recommend shutting off your progress payments, effectively suspending your DOD contract (and cash flow) until you resolve your deficiencies.

More importantly, you will no longer be classified as "low risk" and will be subject to many other types of audits.

ATWORK SYSTEMS PROVIDES OUTSOURCED DCAA-COMPLIANT ACCOUNTING AND SUPPORT SERVICES

If you have doubts about your government accounting systems and internal controls, we're here to help. We're experts in Federal contract accounting and offer a proprietary DCAA-compliant accounting system and represent our clients during DCAA audits.

For more information on how AtWork System's OneLynk can help tighten your process and keep you DCAA audit-ready – book a demo

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