Module 4: Accounting System Setup

The government does not care which accounting software you use. They care that your accounting system can do five things: segregate direct and indirect costs, track costs by contract, maintain daily timesheets, treat similar costs consistently, and separate allowable from unallowable costs.

QuickBooks Online (Plus or Advanced tier) does all five when configured correctly. It is the most common choice for small government contractors because DCAA auditors are familiar with it and know what to look for.

Here is the minimum viable setup:

Step 1: Create a QuickBooks Online account (Plus tier, $80/month). The Plus tier is required because it includes job costing ("Projects" in QuickBooks terminology). The Simple Start and Essentials tiers do not.

Step 2: Turn on Projects. Go to Settings > Account and Settings > Advanced > Projects and enable it. Each government contract becomes a "Project." Every direct expense gets assigned to a project.

Step 3: Turn on Classes. Classes let you separate direct costs, overhead, G&A, and unallowable expenses. Create four classes: Direct, Overhead, G&A, Unallowable. Every transaction gets both a Project (which contract) and a Class (which cost type).

Step 4: Turn on Time Tracking. Go to Settings > Account and Settings > Advanced > Time tracking and enable it. Every hour you work gets logged against a specific Project and activity.

Step 5: Connect your bank account (Mercury, from Module 3). Automatic bank feeds pull transactions into QuickBooks daily. Categorize each transaction as it arrives: assign the right account, class, and project.

That is it. Five steps and you have a DCAA-adequate system. The rest of this module covers the details of what goes where.

Common mistake: buying DCAA-specific accounting software (Unanet, Deltek Costpoint) before you have your first contract. These cost $500-2,000/month and are designed for 50+ person companies. QuickBooks is adequate until you reach roughly $5M in annual contract revenue.

Your chart of accounts is the backbone of your accounting system. For government contractors, it needs four distinct sections that most small business templates do not include.

Here is the chart of accounts you should set up in QuickBooks:

Revenue Accounts (4000 series): 4100 - Direct Contract Revenue. All revenue from government contracts goes here, tagged to the specific Project (contract). 4200 - Commercial Revenue. If you also have non-government revenue, keep it separate. This matters for indirect rate calculations.

Direct Cost Accounts (5000 series): 5100 - Direct Labor. Your billable hours on specific contracts. This is your largest cost category as an IT contractor. 5200 - Direct Materials. Hardware, software licenses, or supplies purchased specifically for a contract. 5300 - Direct Travel. Travel required by a specific contract (flights, hotels, per diem). 5400 - Direct Subcontracts. Payments to subcontractors working on your contract. 5500 - Other Direct Costs (ODCs). Anything else directly attributable to a specific contract.

Indirect Cost Accounts - Overhead (6000 series): 6100 - Indirect Labor. Time spent on tasks that benefit contracts generally but not one specifically (training, internal meetings). 6200 - Rent and Utilities. Your office space costs, allocated across all contracts. 6300 - Software and Tools. Subscriptions used across multiple contracts (Slack, Zoom, ClariFAR). 6400 - Insurance. Business liability, E&O, cyber insurance. 6500 - Professional Development. Training, certifications, conference attendance (allowable per FAR 31.205-44).

G&A Accounts (7000 series): 7100 - Accounting and Legal. CPA fees, legal counsel, bookkeeping. 7200 - Marketing. Proposal costs and business development (allowable per FAR 31.205-18, with limits). 7300 - Office Supplies. General supplies not tied to a specific contract. 7400 - Depreciation. Equipment depreciation (allowable per FAR 31.205-11).

Unallowable Cost Accounts (8000 series): 8100 - Entertainment. Never charge to the government. Includes meals with no documented business purpose. 8200 - Charitable Donations. Not allowable per FAR 31.205-8. 8300 - Interest Expense. Not allowable per FAR 31.205-20 (with narrow exceptions). 8400 - Fines and Penalties. Never allowable per FAR 31.205-15. 8500 - Alcoholic Beverages. Explicitly unallowable per FAR 31.205-51.

Why the 8000 series matters: DCAA auditors will check whether unallowable costs leaked into your overhead or G&A pools. If entertainment expenses end up in your 6000 series (overhead), your indirect rate is inflated and every invoice you submitted is overstated. Having a dedicated unallowable series prevents this.

Set up this chart of accounts before you enter a single transaction. It takes 20 minutes in QuickBooks and saves you thousands in audit remediation later.

"I will fix my accounting when I win a contract" is the most expensive sentence in government contracting.

Here is why DCAA adequacy matters before you have revenue:

Reason 1: Pre-award audits. For cost-reimbursement and time-and-materials contracts above the simplified acquisition threshold ($350K), the contracting officer may request a pre-award accounting system audit before award. If your system fails, you lose the contract. You do not get a second chance to set it up. The audit happens before award, not after.

Reason 2: Indirect rate history. Your indirect rates (overhead rate, G&A rate) are based on historical costs. When you submit your first cost proposal, the government will ask for your provisional indirect rates. If you have been tracking costs properly since formation, you have real rates to propose. If you have been dumping everything into one checking account, you have nothing.

Reason 3: Incurred cost submissions. For cost-type contracts, you must submit an incurred cost proposal (ICP) within 6 months of your fiscal year end. This is a detailed reconciliation of every dollar you charged to the government. If your books are a mess from the start, preparing this submission is a nightmare.

Reason 4: Consistency requirement. FAR 31.203 requires that costs be treated consistently. If you start classifying rent as a direct cost and later switch to indirect, DCAA will question every prior invoice. Starting with the right classifications avoids this entirely.

What "DCAA-adequate" actually means:

DCAA does not certify or approve accounting systems. They issue an opinion: "adequate" or "inadequate." An adequate system meets the five criteria from Lesson 1 of this module. An inadequate system gets a finding letter that lists deficiencies, and the contracting officer decides whether to award the contract anyway (they usually do not).

The Standard Form 1408 (Pre-award Survey of Prospective Contractor Accounting System) is the checklist DCAA uses. It has 25 questions. Every "yes" answer moves you closer to adequate. You should be able to answer "yes" to all 25 before you submit your first proposal.

The good news: for a 1-person LLC using QuickBooks with the setup from Lessons 1 and 2, you can answer "yes" to all 25 questions. The system does not need to be expensive. It needs to be correct.

Timesheets are the most audited document in government contracting. More DCAA findings are issued for timesheet deficiencies than for any other single issue.

The rules are simple but absolute:

Rule 1: Record time daily. Not weekly. Not from memory on Friday afternoon. Daily. DCAA considers after-the-fact timesheets unreliable. If your timesheets are dated Monday through Friday but all entered on Friday at 4pm (QuickBooks logs the entry timestamp), an auditor will flag this.

Rule 2: Every hour goes somewhere. If you work 8 hours, 8 hours appear on your timesheet. If 6 hours were on Contract A and 2 hours were on proposal writing, the timesheet shows 6 direct (Contract A) and 2 indirect (business development). No unaccounted time.

Rule 3: Sign your timesheets. For a solopreneur, you are both the employee and the supervisor. You sign your timesheet as the employee. Best practice: also have a second party (CPA, business partner, or even an automated system) review and countersign monthly.

Rule 4: Do not charge indirect time as direct. If you spent an hour reading a FAR regulation that applies to all your contracts (not just one), that is indirect time. Charging it to a specific contract inflates that contract's costs and is a False Claims Act risk.

Rule 5: Corrections must show the original entry. If you made an error on Monday's timesheet and fix it on Tuesday, the correction must show what the original entry was and what you changed it to. Do not delete and re-enter. QuickBooks Time tracks edit history automatically.

How to set up timesheets in QuickBooks:

Use QuickBooks Time (included with QuickBooks Plus). Create a "Service" for each type of work: direct labor, indirect labor, proposal writing, training, admin. Create a "Customer/Project" for each contract plus one for "Unassigned/Indirect."

Daily workflow: at the end of each workday, open QuickBooks Time on your phone or browser. Enter hours for each service and project. Submit. Total time: 2 minutes per day.

Weekly workflow: on Friday, review the week's entries. Make sure total hours match your work hours. Export or save a PDF of the weekly timesheet. This PDF is your audit documentation.

Monthly workflow: run a "Time by Project" report. Verify that direct hours match your invoices. Verify that indirect hours are reasonable (for a solopreneur, 20-30% indirect is typical). Save the report.

The cost of not doing this: a DCAA auditor who finds unreliable timesheets will question every labor charge on every contract. If you billed $200,000 in direct labor across three contracts and your timesheets are deficient, all $200,000 is at risk. The 2 minutes per day is the cheapest insurance in government contracting.