Key Takeaways
- Even before securing your first government contract, you may have to pass a DCAA Pre-Award Survey. Your accounting system must meet the stringent requirements set by federal agencies, especially when moving from smaller Phase I awards to larger, more financially intensive Phase II awards.
- As you transition from Phase I to Phase II SBIR awards, the expectations for your accounting systems significantly increase. This shift includes moving from a firm fixed price contract to a cost plus fixed fee contract, which demands meticulous financial tracking and management.
- Standard Form 1408 is used to evaluate whether your accounting practices align with federal standards, focusing on aspects such as cost segregation, direct and indirect cost management, and timekeeping.
- Accurate timekeeping is vital, as it substantiates the largest portion of indirect costs for many businesses—employee time spent on non-client-specific activities.
- Team 80 helps you prepare for and navigate the DCAA audit process. We help set up compliant accounting systems and offer ongoing support and advocacy during audits.
It may seem unlikely that you’ll be hit with an audit before you’ve landed your first government contract, but when it comes to obtaining a Small Business Innovation Research (SBIR) award, it’s a real possibility—particularly when dealing with contracts that involve the Department of Defense (DoD) or other federal agencies that require detailed financial and accounting system reviews.
At Team 80, I’ve seen how daunting the DCAA Pre-Award Survey can be for small businesses venturing into SBIR awards and government grants. It’s one of those milestones that can really make you sweat—not just because it’s complex, but because the very future of your funding is so often at stake.
That’s why we’re here. We thrive on turning what seems like an accounting marathon into a manageable walk in the park. In this blog, we’ll dive into the ins and outs of the DCAA Pre-Award Survey, highlighting what you need to focus on and how to prepare your systems to pass with flying colors.
Decoding the DCAA Pre-Award Survey
Before we decipher the details of the DCAA Pre-Award Survey, let’s try to figure out where all this scrutiny comes from. It’s all about the transition from Phase I to Phase II awards, which, as you probably know, involves a whole lot of money.
For Phase I, the requirements are relatively straightforward due to the smaller scale of the awards—typically around $150,000. This level simply requires a basic accounting system to manage modest funding effectively.
However, as you advance to Phase II, the scenario changes dramatically. Here, the awards can surge to approximately $1 million and in some cases even more than that. This significant increase reflects the greater financial risk taken by the federal government, resulting in heightened expectations for financial oversight. Simply put, federal authorities expect more detailed financial management capabilities at this stage.
Your accounting system must accurately manage and report costs, especially distinguishing between direct and indirect expenses and identifying costs that are not allowable under federal guidelines.
Another shift occurs in the type of funding arrangement. Phase I often operates under a firm fixed price (FFP) contract, which is straightforward: complete the project deliverables within the agreed budget. Phase II, on the other hand, may move to a cost plus fixed fee (CPFF) contract. This model reimburses actual costs plus a fixed fee, placing more demands on your accounting system to meticulously track and report expenses specific to the project.
The DCAA Pre-Award Survey focuses on two mandatory components:
The DCAA Pre-Award Survey focuses on two mandatory components:
- Financial Health: They assess if your business has the financial stability required to undertake a two-year project under Phase II conditions.
- Accounting System Adequacy: The core of the survey often revolves around whether your accounting system is sophisticated enough to handle the complexity of Phase II funding.
There are also other areas they might explore, depending on your specific situation:
- Indirect Rate Evaluation: They may review how you’ve calculated indirect rates to make sure they align with realistic costs and are applicable for Phase II billing.
- Compliance with Tax Obligations: It’s also common to check that your business is current with payroll taxes, reinforcing the government’s preference for financially responsible partners.
Measuring up to the DCAA is all about being proactive and setting up systems that do more than just comply—they efficiently manage and leverage financial data for project success.
Spotlight on Standard Form 1408 (SF 1408)
Let’s take a closer look at Standard Form 1408 (SF 1408), a crucial document used by the U.S. federal government to evaluate a contractor’s accounting system before an award is granted. SF 1408 constitutes a thorough assessment of your accounting practices to see if you can accurately estimate and manage costs while adhering to federal regulations.
If there are gaps or inadequacies, you’ll need to address these to qualify for and secure government contracts.
Filling out SF 1408 is typically a responsibility that falls on procurement officers, project managers, or similar roles within your organization. The heart of SF 1408 lies in its stringent criteria for assessing your accounting system. Here’s a breakdown of the 10 critical areas DCAA will scrutinize, which are laid out in the Standard Form SF1408 from the Information for Contractors guide:
- Proper segregation of direct costs from indirect costs.
- Identification and accumulation of direct costs by contract.
- Logical and consistent method for allocating indirect costs.
- Accumulation of costs under general ledger control.
- A reliable timekeeping system.
- A labor distribution system that charges direct and indirect labor accurately.
- Interim determination of costs charged to a contract.
- Exclusion of unallowable costs.
- Identification of cost by contract line item.
- Segregation of pre-production from production costs.
“After the accounting system is set up, Team 80 will complete the SF1408, which details what components of the accounting system meet the DCAA requirements. We will interface directly with the DCAA auditor to ensure that the accounting system meets all of the requirements for the DCAA. We do not require any of the business owner’s time when going through this process.” – Sarah Sinicki, Team 80 CEO
According to the DCAA, the most common area for errors involves requirement 5: the timekeeping system. Let’s zoom in on that detail.
Maintaining timesheets is non-negotiable. Every member of your team, from your front-line staff to your CEO, must document their time, regardless of whether their tasks are directly billable to a client. This is because the largest indirect cost for many small businesses is the time employees spend on non-client-specific activities like business development, proposal writing, and strategy planning.
If you don’t keep accurate timesheets, you’re left vulnerable to significant financial repercussions. For instance, if you can’t account for the time your CEO spends managing the business, those labor costs can’t be factored into your indirect rates. This oversight might mean missing out on essential funds that could help cover a portion of the salaries and benefits for your top executives.
Staying vigilant in these areas strengthens the financial underpinnings of your business as you grow in the federal contracting arena. Let’s keep your accounting systems as robust as your ambitions!
Preparation Tips for SBIR Awardees
I know, the DCAA sounds serious! But with the right guidance and strategy, it becomes a manageable part of securing a government contract. Here are some general tips that have proven invaluable for SBIR awardees.
- Get to Know the DCAA Requirements: It’s crucial to get a good handle on what the DCAA is looking for. Keep your books in order, but more importantly, show that your systems can handle detailed investigation.
- Upgrade Your Accounting Software: Starting with strong accounting software that fits federal standards makes everything easier. It should help you clearly split direct from indirect costs, track timekeeping accurately, and prepare reports that tick all the right boxes.
- Train Your Team Well: Everyone on your project needs to be on the same page about compliance. Hold training sessions to make sure your team knows exactly how to log their time and expenses properly.
- Do Regular Check-Ups Yourself: Don’t wait around for someone else to spot issues. Run regular checks to make sure everything is as it should be. This prepares you for the survey and keeps you in the clear long-term.
- Keep Solid Records: Documentation is your best friend here. Keep detailed records of all your financial doings, decisions, and processes. This way, if the DCAA needs to see proof or ask questions, you’re ready to go.
- Talk to People Who’ve Been There: There’s nothing like advice from someone who’s already been through the process. Chatting with experts who know the ins and outs can save you a lot of time and trouble. They can give you specific advice that fits your situation.
How Can Accounting Professionals Help?
As your accounting professionals, Team 80 brings our expertise directly into setting up and fine-tuning your systems to meet the stringent standards set by the DCAA. From properly segregating costs to implementing compliant timekeeping practices, we cover all the bases to make sure your systems are audit-ready.
“Team 80’s accounting system is fully compliant for DCAA. We use several software tools to meet the requirements of the DCAA. When our clients are going through the pre-award survey, we will interface directly with the DCAA auditor performing the audit so that the client isn’t burdened with this task. The audit process is detailed and requires thorough accounting knowledge to get through, so it’s helpful to have a company like Team 80 handle the audit so the business owner can focus on research and other company needs.” – Sarah Sinicki, Team 80 CEO
During the DCAA audit itself, we stand with you, offering guidance and advocacy in the face of auditor scrutiny. This helps federal officials see the full picture of your financial management practices. In fact, we make it our mission to ensure your side is well-represented, clarifying any points and addressing concerns on the spot.
But our support doesn’t end with the audit. As regulations evolve and your business grows, we continue to offer advice and updates. With Team 80 by your side, you gain long-term partners who are as invested in your success as you are.
Katie Laureano
Team 80 COO
Katie has a gift for helping new clients feel comfortable working with Team 80. She is thorough, striving to understand each client’s unique needs deeply. Using her extensive experience working as an accountant, she can develop an accounting system that will give business owners an understanding of the financial aspects of their company. There is nothing like a concert to get Katie’s blood pumping; music is a big part of her life. You can find her on the water paddle boarding, a boat wake surfing, or snowboarding slopes when she’s not serving our wonderful clients.
