Navigating the SF 1408 Pre-Award Survey: Key Steps to Achieve Compliance

At a Glance

• The main takeaway: Understanding the importance of the SF 1408 Pre-Award Survey is essential for government contractors aiming to secure cost-type contracts.
• Impact on your business: Compliance with these standards can open doors to lucrative contracts with governmental agencies and position your business as a contender for major projects.
• Next steps: Aprio’s team of experienced professionals is dedicated to helping you navigate the complexities of government contracting compliance. Contact our team today.

Schedule a consultation

The Full Story:

The Pre-Award Survey of a Prospective Contractor’s Accounting System (SF 1408) is a critical step in government contracting. It determines whether a contractor’s accounting system meets regulatory requirements and is capable of handling cost-reimbursable (CR) or time-and-materials (T&M) contracts. The Defense Contract Audit Agency (DCAA) or another cognizant audit entity assesses whether the system design complies with Federal Acquisition Regulation (FAR) 16.301-3(a)(3).

Government agencies require this pre-audit when a contractor bids on certain contract types that involve the reimbursement of actual costs. A Contracting Officer (CO) will use the findings of the SF 1408 report to ensure the system adequately tracks costs, ensures compliance, and prevents mischarging. Some Requests for Proposals (RFPs) allow third-party CPA firms to certify accounting system adequacy, particularly when DCAA resources are unavailable.

What Triggers the SF 1408 Requirement?

An SF 1408 pre-audit is required in multiple scenarios, including:

1. Bidding on Cost-Reimbursable or T&M Contracts: FAR 16.301-3(a)(3) mandates that a contractor’s accounting system must be determined adequate before awarding these contract types.
2. Pursuing Large Government-Wide Acquisition Contracts (GWACs) and Multiple Award Contracts (MACs): Many agencies now require an SF 1408-compliant system to compete for large GWACs that include cost-type or hybrid contracts (e.g., Alliant 3, CIO-SP4, OASIS+).
3. Entering a Cost Reimbursable or T&M Subcontract with a Prime Contractor: Many primes require their subcontractors to have an approved accounting system when performing under cost-type contracts. A 3^rd party CPA letter is acceptable for Prime contractors to ensure your system is adequate.
4. Award of Certain Indefinite-Delivery, Indefinite-Quantity (IDIQ) Contracts: Some IDIQ contracts include task orders with cost-reimbursable elements, requiring an approved accounting system.
5. Government Business Growth Strategy: Even if a contractor does not currently have a cost-type contract, having an SF 1408-approved system positions them for future government opportunities.

Key Aspects of an Adequate Accounting System

In order to obtain a successful 1408 letter, contractors must be able to demonstrate that their “System” is performing in a manner that would be able to safeguard the federal government from any mischarging. The 1408 assessment lets the federal government know that you have all the internal controls, manuals, and tools in place to execute challenging contracts. 

It’s important to note that no ERP system comes out of the box being DCAA compliant, nor does DCAA endorse any specific system or software. Their goal is to assess whether the system is set up correctly and is functioning as intended.

A contractor’s accounting system must be designed to ensure compliance with SF 1408 requirements. The following are essential elements auditors evaluate:

• Written Policies and Procedures: Clear documentation on segregation of duties, indirect rate calculation, and internal controls.
• Proper Segregation of Costs: Distinction between direct, indirect, and unallowable costs per FAR 31.201-6.
• Accurate Cost Accumulation: The system must accumulate direct costs by contract and apply indirect costs monthly.
• Indirect Cost Allocation: A logical and consistent method for allocating indirect costs to final cost objectives.
• General Ledger Reconciliation: Costs must be accumulated under general ledger control and subledgers should be regularly reconciled.
• Timekeeping System: A system that tracks labor by project and allows for corrections, approvals, and auditability.
• Labor Distribution Reports: Reports that allocate labor costs based on total time charged.
• Timely Subcontractor Payments: Compliance with FAR 52.216-7 (Paid to Cost Rule).

For a full list of criteria, refer to DCAA’s Pre-Award Accounting System Adequacy Checklist.

Entrance Conference and Walkthrough Meeting

A successful SF 1408 assessment begins with an entrance conference. This meeting outlines the audit process, including the estimated duration, the types of financial records that will be reviewed, and the completion date for the report.

The walkthrough or “show & tell” as we like to call it, provides real time confirmation of your adequate accounting system. 

A walkthrough meeting occurs during or shortly after the entrance conference. Auditors will request walkthroughs to demonstrate how the accounting system design satisfies SF 1408 during the “fieldwork” stage. During this meeting, the contractor representative should be prepared to discuss and/or display the following topics:

• Demonstrate system functionality: Show how the system accumulates costs and applies indirect rates.
• Explain indirect rate calculations: How and when actual indirect rates will be computed and applied to project cost ledgers.
• Show financial tracking capabilities: Demonstrate compliance by presenting general ledger transactions, project status reports, reconciliations, journal entries, and timesheets.

Best Practices for Successfully Passing the SF 1408 Survey

• Use the SF 1408 Form as a Compliance Guide: Create a checklist that aligns with the form’s requirements along with the supporting documentation to validate each item on the checklist.
• Prepare for the Entrance Conference and Walkthrough: Be prepared to explain the ERP system and other tools that are used as part of your “Accounting System.” Additionally, make sure to have your written policies ready to share.
• Ensure Cost Segregation is Correct: Direct, indirect, and unallowable costs should be properly classified and easily discerned by GL account numbering scheme.
• Maintain a Strong Timekeeping System: Ensure all employees are aware of the timekeeping policy.  The system allows for total time accounting and charges to both direct and indirect GL accounts.
• Make a Good First Impression: Be organized, professional, and prepared to showcase your accounting system’s compliance. Keep your responses accurate and concise. 

The bottom line

Securing an adequate accounting system is essential for government contractors pursuing any flexibly priced type contracts, large GWACs, or IDIQs. By proactively preparing for the pre-award audit and implementing best practices, contractors can increase their likelihood of passing and gaining access to high value federal contracts.

A well-prepared accounting system is not just a compliance requirement. It is a strategic advantage for companies aiming to expand in government contracting. 

Need assistance with SF 1408 requirements and compliance? Get in touch with Aprio’s Government Contracting team today.

Related Resources/Assets/Aprio.com articles/pages

• Revenue Recognition for Government Contractors: The Basics
• Navigating FAR 31.205: Selected Costs: Allowable vs Unallowable
• Preparing for Your Financial Statement Audit With This Checklist for Government Contractors