DCAA Pre-Award Survey: Accounting System Adequacy and How to Pass SF 1408

Before a contracting officer awards a cost-reimbursement, time-and-materials, or incentive-type contract, the government frequently asks DCAA to check whether the prospective contractor’s accounting system can actually do what the contract will require of it: track costs by contract, separate direct from indirect, exclude unallowable costs, and support billing. This is the pre-award accounting system survey, and its standard tool is the SF 1408, a 14-criteria checklist. A contractor pursuing its first cost-type award, in particular, should assume this survey is coming and prepare for it well before the proposal is submitted.

When does DCAA conduct a pre-award survey?

A pre-award survey happens when a contracting officer requests one, and that request is nearly automatic in a specific set of circumstances rather than something that applies to every procurement. For current guidance, see IRS accounting periods and methods.

• A contractor’s first cost-reimbursement, T&M, labor-hour, or incentive-type award. If there is no existing determination of accounting system adequacy on file for the business, the contracting officer almost always requests a survey before award.
• A contractor with a prior adequacy finding that is stale or was qualified. If the last determination is several years old, or carried noted deficiencies, a new award can trigger a fresh look.
• A significant change in the contractor’s structure or systems, a merger, an ownership change, or a wholesale replacement of the accounting software, can prompt the government to re-verify adequacy even for a contractor with prior awards.
• It is not required for firm-fixed-price contracts awarded without submission of certified cost or pricing data, because the system adequacy clause (DFARS 252.242-7006) attaches to flexibly priced contract types, not to FFP work priced through competition.

What are the SF 1408’s 14 criteria?

The SF 1408 form organizes the accounting system adequacy question into 14 discrete criteria. Every one has to be satisfied; a strong showing on ten of them does not offset a genuine gap on the other four.

1. Proper segregation of direct costs from indirect costs.
2. Identification and accumulation of direct costs by contract.
3. A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives.
4. Accumulation of costs under general ledger control, with subsidiary cost ledgers reconciled to the general ledger.
5. A timekeeping system that identifies employees’ labor by intermediate or final cost objective.
6. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives.
7. Interim, at least monthly, determination of costs charged to a contract through routine posting of books of account.
8. Exclusion of unallowable and unallocable costs from costs charged to government contracts.
9. Identification of costs by contract line item and by unit, where the contract type requires unit costing.
10. Segregation of preproduction costs from production costs, for contracts that have a distinct preproduction phase.
11. Cost accounting information adequate to support the calculation of progress payment requests and to identify amounts to be withheld.
12. Reliable billing information that reconciles to the accounting records.
13. Adequate, reliable data useful for pricing follow-on procurements and monitoring contract performance.
14. Evidence that the system is in full operation, not merely designed on paper. This last criterion is the one that catches contractors who buy the right software or write the right policy manual right before the survey but cannot show it has actually been running.

What are the possible outcomes of a survey?

DCAA’s report on a pre-award survey lands in one of three places, and each carries a different practical consequence for the pending award.

• Adequate. The system satisfies all 14 criteria, and the contracting officer can proceed with award without a system-related condition.
• Inadequate, with specific deficiencies identified against one or more criteria. The contracting officer generally will not award the contract until the deficiencies are corrected, though in some cases award proceeds with a corrective action plan and a follow-up review scheduled.
• Too new to evaluate. A contractor with little or no operating history under its current accounting setup cannot demonstrate criterion 14 (the system in full operation) no matter how well the system is designed, because there is nothing yet to test. This outcome often leads to a conditional approval, an award with closer post-award monitoring, or a recommendation to delay the survey until the contractor has a longer operating track record.

What are the most common reasons contractors fail?

The same handful of gaps recur across contractors of every size and industry, and most of them trace back to one root cause: the system was built to look right rather than to actually run that way.

• No job cost system by contract. Without cost tracking organized by contract, criteria 2, 4, 7, and 12 all fail simultaneously, because there is no way to accumulate, reconcile, or bill costs at the contract level.
• No formal timekeeping or labor distribution system. Employees logging total hours with no allocation to contract or indirect activity fails criteria 5 and 6 outright.
• No indirect rate pool structure. A single undifferentiated overhead account, with no logical allocation method, fails criterion 3.
• Commingled direct and indirect costs, with no process for excluding unallowable costs. This fails criteria 1 and 8 together, and it is the deficiency most likely to also surface later in an incurred cost audit if the contractor is awarded the contract anyway.
• A system that exists only on paper. A brand-new GovCon software purchase and a freshly written policy manual, installed the week before the survey, cannot demonstrate criterion 14. DCAA specifically looks for evidence of real transaction history, not a system’s theoretical capability.

What’s the timeline from proposal to award, and prep time?

There is no fixed schedule, but the pattern across contractors is consistent enough to plan around.

• A pre-award survey typically follows shortly after proposal submission and precedes award. For a small contractor with organized records and a system that is genuinely operating, the survey itself, from entrance conference to report, can run four to eight weeks.
• For a contractor with real deficiencies, the timeline extends by however long it takes to fix the system, run it long enough to build an operating history that satisfies criterion 14, and go through a second survey. Sixty to ninety days of demonstrated operation under the corrected system is a reasonable benchmark, echoed across most GovCon consulting practices.
• The preparation should start well before the proposal is submitted, not after the survey is requested. A contractor that waits for the survey request to start building its system is, by definition, in the “too new to evaluate” category when the auditor arrives.

What happens if I fail, and how do I remediate?

An inadequate finding is not automatically fatal to the award, but it usually means delay, and for a contractor pursuing its first cost-type contract, delay can mean losing the award to a competitor whose system was already ready.

• The contracting officer typically will not proceed with award of a cost-type contract until the specific deficiencies are corrected, though the government retains discretion to award with conditions in some circumstances.
• Remediation follows the same pattern as the Coastal Robotics example: fix each cited deficiency specifically, operate under the fix long enough to build a real transaction history, and request re-evaluation.
• The deeper adequacy criteria that the SF 1408 checklist is testing for, direct/indirect segregation, timekeeping, unallowable cost exclusion, and cost accumulation by contract, are the same criteria a post-award system audit tests for later. Fixing them for the pre-award survey is not a one-time hurdle; it is the foundation the rest of the contractor’s DCAA compliance sits on, covered in full in the guide on DCAA compliant accounting system requirements.

What should I do next?

If a first cost-type bid is on the horizon, the SF 1408 criteria are the specification to build against, not a checklist to react to once the survey letter arrives. Building the system correctly and running it for a real operating period before the proposal goes in removes the single most common reason contractors fail: a system that looks right on paper but has never actually been used.

• DCAA compliant accounting system requirements, the DFARS 252.242-7006 criteria that underlie every SF 1408 line item
• Setting up as a small government contractor, the full sequence for getting DCAA-ready before a first cost-type proposal
• DCAA timekeeping requirements, the daily-entry and approval system that satisfies criteria 5 and 6
• DCAA audit process, how the pre-award survey fits alongside the other DCAA audit types a contractor will eventually face

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.