The DoD expects a higher level of small business accounting sophistication between Phase I and Phase II. With Phase I SBIR or STTR awards, the Federal government usually expects the small business to have a basic system due to the low dollar amount. For a potentially 10-fold increase in dollars, Phase II contracting officers need to be confident that you have, among other things, accurately estimated your indirect rate. The ability to calculate an accurate indirect rate comes from a good accounting system that differentiates direct from indirect costs while also isolating unallowable costs.  It is suggested that companies interested in pursuing Phase II SBIR contracts and other contracts of similar size with the Department of Defense (DoD), have an adequate accounting system per General Accepted Accounting Principles (GAAP), Generally Accepted Government Auditing Standards (GAGAS), Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS) in place.

The accounting system can be audited by the Defense Contract Audit Agency (DCAA).  DCAA’s requirements and standards are available on their Website at: http://www.dcaa.mil  and click on “Guidance” and then click on “Audit Process Overview – Information for Contractors,” and also at: http://www.dcaa.mil  and click on “Checklists and Tools” and then click on “Pre-award Accounting System Adequacy Checklist”.

The general acceptable accounting system your organization uses must provide reasonable assurance that it is:

• Compliant with the applicable laws and regulations
• Reliable
• At minimal risk for misallocations and mischarges
• Consistent for billing procedures in respect to contract allocations and charges 

More specifically your system should:

• Segregate Direct and Indirect Costs
• Accumulate all costs under the general ledger
• Have a time keeping system and accurately charge direct and indirect labor correctly
• Provide for at least monthly determination of costs charged to the contract
• Identify and segregate unallowable costs
• Identify costs by Contract Line Item (CLIN)
• Provide reliable date for pricing follow-on acquisitions

DCAA Small Business Seminars

DCAA offers targeted information to assist with audit issues that relate to small businesses. Access presentations below for help on specific topics important for smaller contractors:

• Accounting System Requirements: http://www.dcaa.mil/small_business/Accounting_System.pdf 
• Contract Briefs: http://www.dcaa.mil/small_business/Contract_Briefs.pdf 
• Incurred Cost Submissions: http://www.dcaa.mil/small_business/Incurred_Cost_Submissions.pdf 
• Monitoring Subcontracts: http://www.dcaa.mil/small_business/Monitoring_Subcontracts.pdf
• Proposal Adequacy:  http://www.dcaa.mil/small_business/Proposal_Adequacy.pdf 
• Provisional Billing Rates: http://www.dcaa.mil/small_business/Provisional_Billing_Rates.pdf 
• Public Vouchers: http://www.dcaa.mil/small_business/Public_Vouchers.pdf 
• Real-time Labor Evaluations: http://www.dcaa.mil/small_business/Labor_Evaluations.pdf 

 
Checklists & Tools

• DCAA Preaward Accounting System Checklist: This checklist is used for contractors new to government contracting that have cost reimbursement contracts, or for contractors that are receiving progress payments based on cost. The checklist assesses whether the requirements for an adequate accounting system have been met. http://www.dcaa.mil/Preaward_Survey_of_Prospective_Contractor_Accounting_System_Checklist.pdf 
• DoD Contract Pricing Proposal Adequacy Checklist:  This checklist is used for assessing the adequacy of a contract price proposal in accordance with the FAR. The checklist assesses the adequacy of cost or pricing data.  http://www.acq.osd.mil/dpap/dars/dfars/html/current/252215.htm#252.215-7009 
• Incurred Cost Submission Adequacy Checklist:  This checklist is used for assessing the adequacy of final direct and indirect incurred costs to ensure compliance with the contractual requirements under FAR.  http://www.dcaa.mil/Guide_for_Determining_Adequacy_of_Contractor_Incurred_Cost_Proposal.pdf 
• Incurred Cost Electronically (ICE) Model:  The ICE model (the electronic version of "Model Incurred Cost Proposal") assists Contractors in preparing adequate Incurred Cost Proposals.  http://www.dcaa.mil/ice_model.html 
• FAQ for contractors: http://www.dcaa.mil/FAQs_Contractor.pdf 

Additional Links, References and Contact Information

• DCAA website:  http://www.dcaa.mil 
• DCAA Headquarters for general inquiries:  (703) 767-3265
• DCAA Small Business focal point: (703) 767-2271  DCAA-OAL-SmallBusinessFocalPoint@dcaa.mil 
• DCAA Regional Offices, office locator and directions: http://www.dcaa.mil/contact_us.html 
• DoD Office of Small Business Programs: https://www.acq.osd.mil/
• Acquisition Regulations:
• Cost Accounting Standards (CAS):  CAS coverage, administration, and standards can be found in the Electronic Code of Federal Regulations (http://www.ecfr.gov) under Chapter 99, TITLE 48Federal Acquisition Regulations System, “Cost Accounting Standards Board, Office of Federal Procurement Policy, Office of Management and Budget.” The primary information will be found in Chapter 99, Subchapter B, which contains the following sections: Contract Coverage, Cost Accounting Standards, Cost Accounting Standards for Educational Institutions
• Federal Acquisition Regulation (FAR) Cost Principles Guide: http://www.dcaa.mil/FAR_Cost_Principles_Guide.pdf 
• Defense Procurement and Acquisition Policy (DPAP), Defense Federal Acquisition Regulation Supplement (DFARS), and Procedures, Guidance, and Information (PGI): http://www.acq.osd.mil/dpap/dars/dfarspgi/current/index.html 
• U.S. Government Accountability Office (GAO) Generally Accepted Government Auditing Standards “Yellow Book”: http://www.gao.gov/yellowbook/overview 

Helpful Tip:  For those seeking a bit further information, you can take the DCAA training course here: https://sbir.defensebusiness.org/Content/Training/docs/08_Accounting%20System.pdf