Switching a government contractor (GovCon) accounting system is a significant decision that can impact every aspect of a firm’s financial management and compliance.
Transitioning to a new accounting system introduces opportunities for greater efficiency and accuracy, but it also brings challenges that require careful planning and thoughtful consideration.
Before making the move, company leaders and managers need to understand the distinct requirements of GovCon accounting and ensure that the new system meets all regulatory standards.
From reviewing DFARS criteria to meeting record retention obligations, every detail matters for staying compliant and audit-ready.
Why DCAA Compliance is Important
DCAA compliance serves as the foundation of effective accounting practices for various government contractors.
Compliance means that accounting practices align with the standards set by the Defense Contract Audit Agency (DCAA), promoting transparency, accuracy, and adherence to federal regulations.
For government contractors, meeting compliance requirements is essential for winning and retaining contracts. Serious consequences, such as audit failures, the cancellation of contracts, and steep fines, can arise from non-compliance.
To avoid these risks, an accounting system must carefully meet the criteria outlined in the Defense Federal Acquisition Regulation Supplement (DFARS).
Aligning accounting systems and processes with these standards allows for accurate cost tracking and greater compliance with stringent government regulations.
Evaluating the DFARS Accounting Software Criteria
A new accounting system for government contractors must meet several key DFARS criteria to remain compliant. These include maintaining an internal control environment to oversee approval processes, access management, monitoring, and policies.
Systems must also separate direct and indirect costs for accurate project allocation and maintain cost reporting under general ledger control, subsidiary cost ledgers, and transactional details.
Timekeeping and the proper distribution of labor costs are essential here, along with compliance with contract terms, conditions, and applicable laws. These capabilities are essential for maintaining audit readiness and financial accuracy.
Prioritizing systems that have proven successful in government contracting environments can streamline the transition process while meeting compliance requirements effectively.
Planning a Data Migration Strategy
Transferring archival accounting data is an important step in switching to a new accounting system. Maintaining accurate historical records aligns with Federal Acquisition Regulations (FAR), which require most records, such as billing and contract documents, to be retained for at least three years after final repayment.
Gaps in record retention can lead to significant compliance issues during audits. The process begins with a thorough audit of a firm’s existing data to confirm that all records are complete and accurate.
Important items such as billing records, contracts, timekeeping data, and employee compensation records should be identified for the migration process.
During this process, accessibility and data integrity must be prioritized to avoid disruptions. While time-intensive for larger organizations, careful planning during data migration reduces risks and supports smoother operations later.
Assessing the Adequacy of an Accounting System
An adequate accounting system is necessary for certain contract types, including cost reimbursement, cost-sharing, and various cost-plus agreements.
These contracts require precise tracking of costs to meet federal standards, and without an adequate system, eligibility for these contracts may be at risk.
A Contracting Officer (CO) or Administrative Contracting Officer (ACO), in collaboration with the DCAA, serves a fundamental role in assessing the adequacy of systems for transition.
Pre-award reviews by the DCAA or third-party CPA firms provide valuable insights into system readiness and help identify potential gaps. Regular reviews of system adequacy can strengthen compliance efforts and prepare for audits, keeping operations aligned with government regulations over time.
The Role of Third-Party Reviews in Transition Planning
Third-party reviews add significant value when assessing an accounting system during a transition. These reviews help identify potential gaps and support compliance with Requests for Proposals (RFPs), which often require confirmation of an adequate accounting system.
For tight RFP deadlines or when making substantial system changes, third-party assessments offer timely feedback and preparation. These evaluations often serve as a precursor to DCAA audits to maintain readiness while addressing potential concerns before more formal reviews.
Managing Changes Post-Implementation
Switching to a new accounting system requires ongoing monitoring to maintain compliance and operational efficiency.
Changes to a system can be classified as material, such as switching software platforms or restructuring cost pools, or immaterial, such as minor policy updates or additional reporting categories. Both types of changes should be tracked to avoid complications.
Disclosing system changes in provisional billing rates and annual incurred cost submissions supports greater transparency and stricter alignment with federal requirements. Regular training for teams on the new system improves performance and helps prevent potential errors during the transition process.
Treating compliance as a continuous process helps avoid unexpected challenges during audits and keeps operations running smoothly.
Avoiding Common Transitional Pitfalls
System transitions can lead to complications if not properly managed at every step. Missing archival data migration is a frequent issue that can result in compliance problems during audits.
Selecting accounting software that does not meet DFARS compliance standards can create costly setbacks for firms of any size. On top of this, poor processes neglecting record retention requirements, such as those outlined in FAR, may leave important documentation inaccessible.
These challenges can be mitigated with a well-structured transition plan: verifying software compatibility with regulatory requirements, conducting through data migrations, and consulting with experts early in the process can reduce potential risks and setbacks.
Getting Help Switching GovCon Accounting Systems
Switching to a new accounting system for government contracting involves detailed planning and precise execution.
Each step of the process, from meeting DFARS criteria to managing data migration and system changes, plays a role in supporting compliance and operational efficiency. A proactive approach reduces risks and prepares businesses for continued success in navigating government contract requirements.
For assistance with switching accounting systems or other GovCon consulting and accounting needs, schedule a consultation with the professional team of CPAs at Diener & Associates.
Visit us online or call 1-(703)-386-7864 to book your consultation and get expert advice and guidance that’s carefully tailored to meet stringent government contracting requirements.