Government Contractor Accounting Basics
Set up a DCAA-adequate accounting system from day one. It is easier to start right than to fix it after your first contract award.
When do you need this?
A DCAA-adequate accounting system is required for cost-reimbursement, time-and-materials, and most fixed-price contracts above the simplified acquisition threshold ($350K). Below $350K on firm-fixed-price contracts, you have more flexibility, but starting with proper accounting avoids a painful retrofit later.
5 Requirements for DCAA Adequacy
Segregation of Direct and Indirect Costs
Every expense must be classified as either direct (charged to a specific contract) or indirect (allocated across multiple contracts). Your accounting system must track this distinction from day one.
Example: Direct: labor hours on Contract X. Indirect: office rent, internet, accounting software.
Job Costing by Contract
Each government contract must have its own cost center or job code. All direct costs are charged to the specific contract they benefit. You cannot pool costs across contracts and split them later.
Example: Job 2026-001 (Army IT support), Job 2026-002 (DHS cyber assessment). Each tracks its own labor, materials, and travel.
Timesheet Discipline
All labor hours must be recorded daily on timesheets that identify which contract or indirect activity the time was spent on. Timesheets must be signed by the employee. For a solopreneur, you sign your own timesheets.
Example: Monday: 6 hours direct (Contract 2026-001), 2 hours indirect (proposal writing). Signed daily.
Consistent Treatment of Costs
If you classify a type of cost as direct on one contract, you must classify it as direct on all contracts. If you classify it as indirect, it must be indirect everywhere. Consistency is what DCAA auditors check first.
Example: If you charge travel as direct on Contract A, you cannot charge similar travel as indirect on Contract B.
Separation of Allowable and Unallowable Costs
FAR Part 31 defines which costs are allowable (reimbursable) and unallowable (you cannot charge the government). Your accounting system must flag unallowable costs so they are excluded from indirect cost pools and billings.
Example: Unallowable: entertainment, alcohol, donations, fines, interest on borrowings. Allowable: rent, utilities, professional development, insurance.
Starter Chart of Accounts
Minimum viable chart of accounts for a small government contractor using QuickBooks or similar.
Revenue
4100 - Direct Contract Revenue
4200 - T&M Contract Revenue
4300 - CPFF Contract Revenue
Direct Costs
5100 - Direct Labor
5200 - Direct Materials
5300 - Direct Travel
5400 - Direct Subcontracts
5500 - Other Direct Costs
Indirect Costs (Overhead)
6100 - Indirect Labor
6200 - Rent/Utilities
6300 - Software/Tools
6400 - Insurance
6500 - Professional Development
G&A (General & Administrative)
7100 - Accounting/Legal
7200 - Marketing (allowable portion)
7300 - Office Supplies
7400 - Depreciation
Unallowable
8100 - Entertainment
8200 - Donations
8300 - Interest Expense
8400 - Fines/Penalties
Check your FAR Part 31 obligations
Ask ClariFAR about allowable vs unallowable costs for your specific situation.
Ask ClariFARFAQ
Can I use QuickBooks for government contract accounting?
Yes. QuickBooks with proper job costing setup is the most common choice for small government contractors. You need to configure classes or jobs for each contract and maintain separate direct/indirect cost tracking.
What happens if my accounting system is not DCAA-adequate?
You will be limited to firm-fixed-price contracts under the simplified acquisition threshold ($350K). For cost-reimbursement, T&M, or larger contracts, the contracting officer may require a pre-award accounting system audit.
Do I need an accounting system audit before my first contract?
Not necessarily for your first small contract. DCAA audits are typically triggered by cost-reimbursement contracts or contracts above certain thresholds. But having an adequate system from day one prevents costly rework.
What is the difference between overhead and G&A?
Overhead costs benefit specific contracts indirectly (rent for the office where contract work happens). G&A costs benefit the entire organization (CEO salary, corporate insurance, accounting fees). Both are indirect, but they go into different pools with different allocation bases.
This guide is for informational purposes only. Consult a CPA experienced in government contract accounting for your specific situation.