DCAA Compliant Accounting System for SBIR Awards

What is a DCAA compliant accounting system?

It is shorthand. The phrase does not appear in the FAR sections or the DFARS clause cited on this page. What they say is that, for a cost-reimbursement contract, the contractor's accounting system must be adequate for determining the costs that apply to the contract (FAR 16.301-3(a)(3)), and the DFARS accounting system clause calls a system that meets its listed criteria an acceptable accounting system. In practice the term means a system that keeps direct and indirect costs apart, charges costs to each contract, computes indirect rates from the books, and keeps unallowable costs out of what you bill.

Sources: FAR 16.301-3, DFARS 252.242-7006, Accounting System Administration. FAR 31.002 also points contractors who need help with their accounting systems to DCAA's guide, Information for Contractors.

Does my SBIR or STTR award require one?

It depends on the type of award, not on the program name. Each agency runs its own SBIR and STTR program, and your award document tells you whether you hold a contract, a grant or a cooperative agreement. If you are offered a cost-reimbursement contract, FAR 16.301-3(a)(3) says it may be used only when your accounting system is adequate for determining costs applicable to the contract, and a pre-award survey on SF 1408 is how a buyer can check. If the award is a firm-fixed-price contract, that limit is written for cost-reimbursement contracts and does not reach it. If the award is a grant or cooperative agreement, the FAR does not govern it. Grants typically follow 2 CFR Part 200, which asks for a financial management system that meets 2 CFR 200.302, and the terms of your award decide the rest. Read your award document or solicitation, and ask your contracting or grants officer if the type is unclear.

• Cost-reimbursement contract. The limit in FAR 16.301-3(a)(3) applies. Related rules usually come with it: the allowable cost and payment clause at FAR 52.216-7 has you bill at billing rates until final rates are set, and then submit a final indirect cost rate proposal within six months after the end of each fiscal year.
• Department of Defense contract. The DFARS accounting system clause lists 18 system criteria. It applies when your contract includes it, so look for 252.242-7006 in your clauses.
• Firm-fixed-price contract. The FAR 16.301-3 limit is written for cost-reimbursement contracts. You still need books that support your costs and your price.
• Grant or cooperative agreement. The FAR does not govern it. Federal grants typically follow 2 CFR Part 200, whose section 200.302 sets financial management requirements, and the award terms decide the rest.

Source for the program structure: SBIR.gov, About, which says each participating agency administers its own SBIR and STTR program. Even before award, FAR 9.104-1(e) lists accounting and operational controls among the standards for being found a responsible contractor (FAR 9.104-1).

What does the SF 1408 pre-award survey check?

Standard Form 1408, Preaward Survey of Prospective Contractor Accounting System, records a recommendation (acceptable for award, not acceptable, or acceptable with a follow-on review after award) and a checklist. The checklist covers generally accepted accounting principles, ten accounting system features (separating direct from indirect costs, accumulating costs by contract, allocating indirect costs, general ledger control, timekeeping, labor distribution, monthly posting, excluding unallowable costs, line-item costing and separating preproduction costs), financial information for cost-limitation and progress-payment clauses, data for pricing follow-on work, and whether the system is in full operation. The full list is below.

Section II of the form, in plain words:

1. The system follows generally accepted accounting principles for your circumstances.
2. Direct costs are kept separate from indirect costs.
3. Direct costs are identified and accumulated by contract.
4. There is a logical and consistent method for allocating indirect costs to intermediate and final cost objectives. A contract is a final cost objective.
5. Costs are accumulated under general ledger control.
6. A timekeeping system identifies employees' labor by intermediate or final cost objective.
7. A labor distribution system charges direct and indirect labor to the right cost objectives.
8. Costs charged to a contract are determined at least monthly by routine posting to the books of account.
9. Amounts that are not allowable under FAR Part 31 or the contract are excluded from costs charged to the government.
10. Costs can be identified by contract line item and by unit, if the contract requires it.
11. Preproduction costs are separated from production costs.
12. The system provides the financial information that cost-limitation and progress-payment clauses require.
13. Records are kept so that adequate, reliable data exist for pricing follow-on acquisitions.
14. The system is currently in full operation. If not, the survey notes which parts are running, set up, anticipated or nonexistent.

Source: Standard Form 1408, Preaward Survey of Prospective Contractor (Accounting System), revision 1/2014. The paraphrase above follows the form's checklist items 1 to 5. Forms are reissued, so confirm you have the current edition. The DFARS clause adds criteria such as reconciling subsidiary ledgers to the general ledger, approving and documenting adjusting entries, periodic management reviews and accounting information that lets you calculate indirect rates from the books.

What is an indirect rate and how do I calculate one?

An indirect rate spreads costs that benefit more than one project across your projects. You collect those costs into a pool, such as fringe benefits, overhead or general and administrative (G&A), pick a base that fits the pool, such as direct labor, and divide pool by base. FAR 31.203 requires logical cost groupings, a base common to all the cost objectives the pool is allocated to, and no fragmenting of the base once it is accepted. The free worksheet on this page walks through one common three-pool structure with example numbers you replace with your own.

A direct cost is one you can charge to a single contract. FAR 31.202 says you cannot charge a cost directly to a contract if costs incurred for the same purpose in like circumstances sit in an indirect pool. Indirect costs are what remain, and FAR 31.203 says to accumulate them in logical groupings and allocate each on a base common to the cost objectives it serves. For contracts not covered by Cost Accounting Standards, the base period is your fiscal year.

One more FAR 31.203(d) rule catches people out: once a base is accepted, everything that properly belongs in it bears its share of the indirect costs, whether the item is allowable or unallowable. The pool leaves unallowable costs out. The base does not.

The worksheet uses the example numbers below. Replace them with your own.

In the example, direct labor is 300,000, overhead labor 60,000 and G&A labor 90,000. Fringe applies to all labor, overhead applies to direct labor, and G&A applies to total cost input: direct labor, its fringe, the overhead pool and 100,000 of other direct costs. A direct employee paid $75.00 an hour then carries a burdened rate of $151.03 before any fee or profit. This is one common structure, not the only one, and your rates must be applied consistently. Sources: FAR 31.202, FAR 31.203.

Which costs are allowable?

FAR 31.201-2(a) says a cost is allowable only when it meets all five conditions: reasonable, allocable, consistent with CAS Board standards or generally accepted accounting principles, consistent with the contract terms, and within any limits in Subpart 31.2. FAR 31.201-2(d) puts the burden on you to keep records that show the costs were incurred, are allocable to the contract and comply with the cost principles, and lets the contracting officer disallow costs that are inadequately supported. FAR 31.201-4 says a cost is allocable if it is incurred specifically for the contract, benefits both the contract and other work in reasonable proportion, or is necessary to the overall operation of the business.

Some costs the cost principles make unallowable, and the section to check:

• Contributions or donations: FAR 31.205-8
• Entertainment costs: FAR 31.205-14
• Fines, penalties and mischarging costs: FAR 31.205-15
• Interest and other financial costs: FAR 31.205-20
• Lobbying and political activity costs: FAR 31.205-22
• Costs of alcoholic beverages: FAR 31.205-51

Several of these have exceptions, so read the section before you book a cost. The list is a sample, not every unallowable cost. Sources: FAR 31.201-2, FAR 31.201-4 and the sections linked above.

What about indirect rates on an NIH SBIR grant?

Grants have their own rules. The NIH Grants Policy Statement, section 18.5.4.3 (revised March 2026), says that if you have a currently effective negotiated indirect cost rate with a federal agency you use it, adjusted to remove IR&D, which is not allowable under HHS awards. If you do not have one, a Phase I applicant should propose estimated indirect costs at a rate not to exceed 40 percent of total direct costs, and NIH will not negotiate indirect rates for Phase I awards. For Phase II, a requested rate of 40 percent of total direct costs or less needs no further justification at the time of award, and a higher requested rate is negotiated by DFAS. In every case only actual indirect costs may be charged to the project, and the rate you charge cannot exceed the awarded rate unless you negotiate one. Other agencies set their own limits, so read the solicitation budget instructions.

Source: NIH Grants Policy Statement 18.5.4, Allowable Costs and Fee. Check the current version before you rely on a limit, because agencies update these.

How to prepare, step by step

1. Find out what kind of award you have. Read the solicitation or award document. A cost-reimbursement contract brings the FAR 16.301-3 limit. A fixed-price contract, grant or cooperative agreement works differently. Ask the contracting or grants officer if it is unclear.
2. Separate direct and indirect accounts. Give direct costs, fringe, overhead, G&A and unallowable costs their own accounts so the pools fall out of the ledger instead of being rebuilt in a spreadsheet each year.
3. Record time by project. Set up timekeeping that shows each employee's hours by project and by indirect category, with a labor distribution that posts those hours to the books.
4. Keep unallowable costs out of the pools. Book entertainment, alcohol, donations, fines, lobbying and similar costs to their own accounts from day one. Check each cost against FAR 31.201-2 and Subpart 31.2.
5. Compute provisional rates from your own books. Download the worksheet, replace the example numbers with last fiscal year actuals, and read the fringe, overhead and G&A rates.
6. Post to the books monthly and reconcile. Post costs to contracts at least monthly and tie the contract cost records back to the general ledger.
7. Have a government contracts accountant review it. Before a survey or your first billing, ask an accountant with government contract experience to review the setup and the rate structure.

If you are still working on the proposal itself, start with how to apply for SBIR grants.

When you want the accounts and rates built for you

The free CSV is a single worksheet. It does not give you an account list or separate tabs for each pool. If you want those, Palavir, the company behind FindGrants, sells two Excel workbooks on Etsy. Details below come from each listing and the files themselves.

More questions

Related guides

• How to apply for SBIR grants
• Grant budget template
• Grant reporting template
• Nonprofit chart of accounts template