DFARS 252-242-7006, Accounting System Administration

The government (Department of Defense) implemented a regulation dictating that DoD contractors’ accounting system must be adequate as defined by this clause. This is the first time the government has officially in universal terms defined by contract clause what an adequate accounting system is and penalties for falling short of these requirements. Prior to this regulation, the government has only required an adequate accounting system to secure a cost type contract. The requirements for an adequate system were only generally referred to in regulations leaving the interpretation of an adequate system criteria to DCAA auditors. This clause applies to cost reimbursement, incentive type, time and materials and labor hour contracts or contracts with progress payments based on costs or progress payments based on stage of completion.

This clause as revised in 2012 is significant for a number of reasons:

1. First time the government has defined an adequate accounting system by regulation.
2. Clause includes penalties or other negative action for not having a compliant system
3. Officially applies this adequacy criteria to non-cost type contracts.

The Criteria

The criteria for an adequate accounting system is similar to the criteria outlined by SF 1408 and DCAA audit guidance on accounting system audits. These criteria include but not limited to:

1.) A sound internal control environment, accounting framework, and organizational structure;
(2) Proper segregation of direct costs from indirect costs;
(3) Identification and accumulation of direct costs by contract;
(4) A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives;
(5) Accumulation of costs under general ledger control;
(6) Reconciliation of subsidiary cost ledgers and cost objectives to general ledger;
(7) Approval and documentation of adjusting entries;
(8) Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices;
(9) A timekeeping system that identifies employees’ labor by intermediate or final cost objectives;
(10) A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;
(11) Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account;
(12) Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions;
(13) Identification of costs by contract line item and by units (as if each unit or line item were a separate contract), if required by the contract;
(14) Segregation of preproduction costs from production costs, as applicable;
(15) Cost accounting information, as required—

(i) By contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR 52.232-22), or allowable cost and payment (FAR 52.216-7); and (ii) To readily calculate indirect cost rates from the books of accounts;

(16) Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms;
(17) Adequate, reliable data for use in pricing follow-on acquisitions; and
(18) Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.

The Process

Once an inadequacy is identified (usually by DCAA audit):

(1)The Contracting Officer will provide an initial determination in writing, on any significant deficiencies. The initial determination will describe the deficiency in sufficient detail.
(2) The Contractor shall respond within 30 days to a written initial determination from the Contracting Officer that identifies significant deficiencies in the Contractor’s accounting system. If the Contractor disagrees with the initial determination, the Contractor shall state, in writing, its rationale for disagreeing.
(3) The Contracting Officer will evaluate the Contractor’s response and notify the Contractor, in writing, of the Contracting Officer’s final determination concerning—
(i) Remaining significant deficiencies;
(ii) The adequacy of any proposed or completed corrective action; and
(iii) System disapproval, if the Contracting Officer determines that one or more significant deficiencies remain.
(e) If the Contractor receives the Contracting Officer’s final determination of significant deficiencies, the Contractor shall, within 45 days of receipt of the final determination, either correct the significant deficiencies or submit an acceptable corrective action plan showing milestones and actions to eliminate the significant deficiencies.


Obviously the most severe penalty is the disapproval of the accounting system which shall prevent the contractor from securing cost type contracts until corrected and the system disapproval is lifted. Contract price and profit could be impacted if the deficiencies effect negotiations. Also another form of contract may be considered to eliminate any concerns that the deficiency would impact the government. In addition, if the clause 252-242-7005, Contractor Business Systems is included in the contract the contracting officer will withhold payment in accordance with that clause.
My advice is get your system in order to permit passing any DCAA audit, gain the confidence when contracting officer inquiries are made and to avoid any negative actions on contract awards.

My Experience

It is quite apparent that having an adequate accounting system is now a pre-requisite for many government contracts. Failure to meet this test can now result in stifled growth and other negative actions. I possess over 30 years’ experience helping contractor’s secure approval of their accounting systems. I have helped many contractors to successfully pass DCAA audits and secure government approval of their accounting systems.