SF 1408 Pre-Award Accounting System Survey: Criteria and Audit

The SF 1408 pre-award accounting system survey is the government’s evaluation of whether a prospective contractor’s books can handle a cost-reimbursement contract. A Defense Contract Audit Agency (DCAA) auditor scores the system against five criteria on Standard Form 1408, examining GAAP compliance, system design, financial reporting, historical pricing data, and whether the system is fully operational.¹ An inadequate determination blocks the award, so a business pursuing its first cost-type contract needs to understand exactly what the auditor is checking and how to prove the system works in practice.

When the Survey Applies to Your Contract

The Federal Acquisition Regulation permits a cost-reimbursement contract only when the contractor’s accounting system is adequate for determining the costs applicable to that contract.² That rule sweeps in cost-plus-fixed-fee, cost-plus-incentive-fee, cost-plus-award-fee, and time-and-materials awards. Any contract structure where the government reimburses actual incurred costs will typically prompt a survey, because the contracting officer needs to know the books can produce trustworthy cost data.

The contracting officer requests the survey when the information already on file is not sufficient to determine whether the contractor can handle the financial requirements of the proposed contract. Fixed-price awards below the simplified acquisition threshold and acquisitions of commercial products or services generally do not warrant this level of scrutiny.³ A firm that only pursues firm-fixed-price work and never invoices the government for actual costs is unlikely to encounter the SF 1408 at all.

The Five Criteria on the Form

The SF 1408 organizes its evaluation into five sections. Knowing what each one scores makes preparation far more targeted than reading the form cold.¹

GAAP Compliance

The system must follow Generally Accepted Accounting Principles appropriate to the contractor’s circumstances. This is a threshold check. If the books are not maintained under GAAP, nothing else on the form matters much.

System Design

This is the longest section, and it is where most deficiencies surface. The accounting system must provide for:

Segregation of direct and indirect costs, with every expense landing in one category or the other.
Accumulation of direct costs by contract, so each contract functions as its own cost center.
Consistent allocation of indirect costs through a logical, repeatable method.
General ledger control over all costs, so the ledger serves as the master record.
Timekeeping that identifies each employee’s labor hours by contract or indirect category.
A labor distribution mechanism that charges direct and indirect labor to the right cost objectives.
Monthly posting of contract costs to the books.
Screening out of unallowable costs under FAR Part 31.
Cost identification by contract line item where the contract requires it.
Segregation of preproduction costs from production costs when applicable.

Financial Reporting

The system must produce the data needed to comply with limitation-of-cost and limitation-of-funds clauses and to support progress payment requests. If your software cannot generate a report showing cumulative costs against the contract ceiling, this criterion will fail.

Pricing Data for Follow-On Work

The books must produce reliable historical cost data that the government can use to price future contracts. Contractors who cut corners on job-cost tracking get caught here: if actual cost data is unreliable, the government cannot negotiate a fair price next time.

Operational Status

The system must be fully operational at the time of the survey. A system that is designed but not yet running, or one that exists only as a set of planned procedures, will not pass. The auditor wants live transactions flowing through the books.

What Auditors Actually Test

Labor and Timekeeping

Labor is the biggest cost category for most service contractors, and it is where auditors spend the most time. Every employee working on government contracts must record hours daily, assigning each block of time to a specific contract number or an indirect code. Timesheet corrections need a documented approval process, not just a software override. The labor distribution system takes those approved hours and charges them to the corresponding cost objectives. DCAA auditors will pull timesheets, trace them to payroll, and compare both to the general ledger. Those three records must reconcile.

Indirect Cost Pools

Most government contractors organize indirect costs into a tiered structure with three pools: fringe benefits, overhead, and general and administrative (G&A) expenses.⁴ Fringe covers payroll taxes, health insurance, and retirement contributions. Overhead captures costs that support specific operations but cannot be tied to a single contract, such as indirect labor, facility costs, and equipment depreciation. G&A covers the cost of running the business as a whole: executive salaries, accounting, legal, and business development.

Each pool gets allocated to contracts using a base that reflects a real relationship between the pool and the work. The arithmetic is simple. Divide the pool by its allocation base to get a rate, then multiply that rate by each contract’s share of the base. What trips up new contractors is consistency. Once you pick a method for allocating a pool, you must apply it the same way every time. Switching methods mid-year, or applying different bases to similar contracts, produces exactly the kind of inconsistency that generates an inadequate finding.

Unallowable Costs

FAR Part 31 lists dozens of cost categories the government will not reimburse.⁵ The most common are entertainment, bad debts, lobbying and political activity, certain advertising and public relations expenses, and legal costs arising from fraud proceedings or regulatory violations.⁶ Alcohol is another classic example that catches contractors who expense client dinners without thinking about it.

Your system needs a mechanism to flag and exclude these costs before they appear on a government invoice. Some contractors handle this with specific account codes in the chart of accounts that are automatically excluded from billing. Others rely on a manual review before each invoice goes out. Either works, but the auditor will not take your word that you catch unallowable costs. They want to see the filter in action, backed by a written procedure and evidence that someone actually follows it.

Audit Trail and Job Cost Reporting

Every dollar billed to the government must be traceable from the invoice back to a source document: a receipt, a timesheet, a purchase order. The trail runs through the general ledger and ties back to job cost reports, which accumulate every expense under a specific contract number. That report is the bridge between your books and your invoices. If the auditor picks a line item on an invoice and cannot trace it through the ledger to the underlying documentation within a reasonable amount of time, that is a deficiency.

Documents to Have Ready

The SF 1408 form is available through the GSA Forms Library, and the contractor completes its portion before the auditor arrives.⁷ The form is the starting point. The real preparation is assembling the evidence that backs up each answer:

A chart of accounts with separate codes for direct labor, indirect labor, fringe, overhead, G&A, and unallowable costs.
An accounting procedures manual covering how transactions are recorded, how labor hours are captured and approved, how indirect costs are allocated, and how unallowable costs are identified and excluded.
A standalone timekeeping policy distributed to all employees, specifying daily recording requirements, correction procedures, and supervisor approval steps.
Sample job cost reports, trial balances, and indirect rate calculations demonstrating the system produces the outputs the government needs.
Internal review evidence showing someone periodically reconciles subsidiary ledgers to the general ledger and reviews cost allocations for accuracy.

Having these organized before the auditor requests them signals the system is genuinely operational. Scrambling to produce a procedures manual after the survey is announced tells the auditor the opposite.

How the Engagement Runs

The process starts when the procuring contracting officer sends an audit request to DCAA.⁸ A DCAA auditor then contacts the contractor to schedule either a site visit or a virtual walkthrough. During the engagement, the auditor interviews key personnel, examines documentation, and asks to see the system in operation. Expect a live demonstration of timekeeping entries, a payroll reconciliation, and a job cost report pulled in real time. They are checking that the written procedures match what happens day to day.

After the examination, the auditor issues a report with findings and an opinion on whether the system is adequately designed for the proposed contract. That report goes to the contracting officer, who makes the final award decision. Minor deficiencies do not always kill the deal, and the contracting officer has discretion to allow a brief corrective action period before making the final determination. Material weaknesses, such as no timekeeping system at all or a complete absence of indirect cost segregation, are much harder to fix on a short timeline.

Recovering From an Inadequate Determination

An inadequate finding is not permanent, but it requires concrete action. DCAA will perform a follow-up audit to verify corrective actions, provided the original audit was completed within the last twelve months and the contractor has not made unrelated major changes to system design.⁹ The follow-up is narrowly scoped: the auditor checks whether the specific deficiencies have been corrected and whether any unrelated system changes have occurred. If both checks are clear, the auditor can issue a revised opinion stating the system is now adequate for award.

A superficial fix is the wrong response. If the auditor cited your timekeeping policy as deficient, writing a new policy document alone will not be enough. The follow-up auditor will want to see employees actually following the revised procedures, with several weeks or months of compliant timesheets as evidence. DCAA auditors will not issue an adequate opinion while known deficiencies still exist.⁹ Treat the deficiency report as a checklist and address every item before requesting the follow-up.

Passing the Survey Is Not the End

The SF 1408 evaluates whether your system is ready at award. For Department of Defense contracts, DFARS 252.242-7006 imposes ongoing accounting system requirements that go beyond the SF 1408, listing 18 criteria that apply during performance, including reconciliation of subsidiary ledgers to the general ledger, approval and documentation of adjusting entries, and management reviews or internal audits of the system.¹⁰ Under DFARS 252.242-7005, a post-award determination of material weaknesses triggers a 5 percent withholding on progress payments and performance-based payments, with 45 days to correct or submit an acceptable corrective action plan.¹¹ Building a system that passes the SF 1408 is worth doing well the first time, because the same system will be scrutinized again once the contract is running.

1
General Services Administration. Standard Form 1408 – Preaward Survey of Prospective Contractor Accounting System
2
Acquisition.GOV. FAR 16.301-3 – Limitations
3
eCFR. 48 CFR 9.106-1 – Conditions for Preaward Surveys
4
Defense Contract Audit Agency. Overview of Indirect Costs and Rates
5
eCFR. 48 CFR Part 31 – Contract Cost Principles and Procedures
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eCFR. 48 CFR 31.205-22 – Lobbying and Political Activity Costs
7
Acquisition.GOV. FAR 53.209-1 – Responsible Prospective Contractors
8
Defense Contract Audit Agency. 17740 Preaward Survey of Prospective Contractor Accounting System
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Defense Contract Audit Agency. Chapter 5 – Audit of Contractor Compliance with DFARS for Business Systems
10
Acquisition.GOV. DFARS 252.242-7006 Accounting System Administration
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Acquisition.GOV. DFARS 252.242-7005 Contractor Business Systems