How to Prepare for the SF 1408 Pre-Award Accounting System Audit

Summary

• The SF 1408 accounting system evaluation is a critical pre-award requirement that government contractors must satisfy, requiring detailed verification that systems segregate costs, track labor, and comply with generally accepted accounting principles (GAAP).
• Pre-award audit success hinges on consistent year-round practices: accurate segregation of direct and indirect costs, organized documentation, and monthly accounting process reviews that demonstrate the accounting system’s integrity.
• Contractors prepared with proper documentation, supported systems, and a clear understanding of DCAA expectations can navigate the pre-award audit process effectively and reduce delays that could damage their reputation with the government.

_________________________________________________________________________________

For government contractors, audit scrutiny is only the beginning—they confront a far wider range of challenges that require strategic thinking. The intricate, technical language of each compliance obligation, from the initial proposal through the final contract close-out, can be difficult to understand without additional resources and knowledge. Even the most seasoned contractors encounter regulations that require external insights. Standard Form 1408 (SF 1408) is no exception: As one of the more complex steps in a pre-award audit, understanding how the DCAA determines what constitutes a suitable accounting system is key to government contractors passing the audit and being awarded contracts. 

Understanding the SF 1408 

The SF 1408 is used by the DCAA to assess a contractor’s accounting system before issuing an award. Essentially, it’s the government’s due diligence that confirms the contractor’s accounting system meets compliance requirements and everything is reported accurately and in a timely manner. 

How the DCAA pre-award process works 

Once the DCAA receives SF 1408, a pre-award audit is initiated. The DCAA will carefully review and verify the responses, identify potential risks, and finally, provide feedback to the government agency or department awarding the contract.  

It’s important for contractors to understand the 1408 requirements below and be aware of what the pre-award audit specifically looks for. Aside from general business information: legal business name, address, signatures, etc., the crux of the SF 1408 is the accounting system evaluation checklist and supporting documentation.  

SF 1408 accounting system evaluation checklist 

The contractor must verify that the accounting system is in accordance with generally accepted accounting principles (GAAP) and accurately:  

• Segregates direct costs and indirect costs 
• Identifies direct costs by contract 
• Allocates indirect costs to intermediate and final cost objectives 
• Accumulates direct costs under a general ledger 
• Records timekeeping  
• Matching employee labor to intermediate and final cost objectives 
• Confirms that direct and indirect labor are charged to the correct cost objectives 
• Excludes costs charged to government contracts that aren’t allowable under contract provisions 
• Identifies costs by line item, units, and CLIN line if required by the contract in question 
• Separates preproduction and production costs  
• Fully equipped to support and substantiate requests for progress payments 

Additional requirements and supporting documentation 

The accounting system must also be able to produce specific financial information required by certain contract clauses, such as limitations on costs or payments, or information for progress payments, and maintain records in a manner that produces reliable data for pricing follow-on acquisitions.   

All supporting documentation should be provided and readily available to confirm the responses to the evaluation checklist. While documents may vary per contract, financial statements, policies and procedures manual, and organizational charts are generally required. Finally, they must indicate whether their accounting system is fully operational, set up but not yet operational, anticipated, or nonexistent. 

How to prepare for SF 1408 compliance 

Being awarded government contracts offers more than just the benefit of the contract itself. Previous relationships and good standing with the DCAA indicate whether a contractor has been frequently subbed out by a prime on another contract or if they have a good track record. Agencies want to know: Who will confidently get the promised job done? Because of the complex pre-award requirements, knowing key points of scrutiny may mean the difference between securing and missing out on an award.  

Whether preparing for a 1408 or otherwise, confirming your direct and indirect costs are accurate, consistently maintaining organized systems and documentation, and completing monthly accounting process reviews are among the most integral aspects a contractor can take in preparing for a pre-award audit. With proper documentation and accounting system practices in place, external reviews and the SF 1408 itself can be seamless. These best practices also prevent the risk of delays that may not only penalize your pre-award audit but can also damage your reputation in the eyes of the DCAA.  

If you are anticipating or currently in the process of a 1408, or using Unanet as your ERP and accounting system, contact our team using the form below, and we’ll help you prepare for your SF 1408 pre-award audit and DCAA compliance needs.