During this past quarter of relentless proposal writing, our clients frequently asked for assistance with approving their accounting system for federal government work under cost-reimbursable contracts. Requests for Proposals (RFPs), which require an adequate accounting system per FAR 16.301-3(a)(3), solicitation provisions may often demand evidence of “acceptability,” “adequacy,” or “approval” as a condition of award. Prime contractors may also request the same from their subcontractors to meet their subcontract monitoring requirement.
We see RFPs being issued with either SF 1408 (Pre-Award Survey of Prospective Accounting System) or Accounting System Review (ASR) requirements as a pre-requisite to a contract award that third- party CPA firms can perform. Sometimes RFPs are not clear on what the government wants. As previously discussed in our blogs, understanding RFP requirements and draft-contract clauses are tantamount to enabling a successful proposal submission. In many instances, primes may ask for a higher-level assertion of the accounting system, then the contemplated contract requires. Understanding these requirements is extremely important in negotiating contract requirements with prime contractors.
What Should Contractors Know about Accounting System Assessments?
Does the RFP require you to have an adequate accounting system that can perform on a cost reimbursable contract (SF 1408) or an acceptable or approved accounting system based on the 18 accounting-system criteria presented in Defense FAR Supplement (DFARS), clause 252.242-7006?
Significant Differences Between the Two
SF (standard form) 1408
- Used when a company is new to government contracting or new to cost reimbursement contracts;
- Provides a recommendation without any assurance on adequacy or suitability of the accounting system;
- Involves the evaluation of the design effectiveness not the operating effectiveness of the accounting system (meaning the system may not be currently set up); and
- Generally, does not involve tests of transactions and hence quicker to perform and does not result in an audit opinion.
- Opines on the compliance with criteria as prescribed in the DFARS clause;
- Involves detailed testing of transactions to ensure operating effectiveness of the accounting system; (system must be up and running with historical transaction data);
- Takes time to complete (often 1-2 months, at least);
- Puts final determination of accounting-system adequacy in the hands of the contracting officer or the administrative contracting officer; and
- Confirms that an accounting system review is valid for three years in the absence of any material changes in the accounting system.
Benefits of an Approved Accounting System
- Gives Contractors a competitive advantage by reducing the pool of competitors when RFP’s have these requirements;
- Is compliant with RFPs contemplating cost-reimbursable contracts or CLINs;
- Many agencies are adopting the DFARS criteria as a sound model for an acceptable system;
- Most agencies will accept a qualified CPA firm opinion on accounting system adequacy.
What Can Contractors Do?
- Be proactive with contracting officers! Utilize the RFP Q&A process to clarify business system requirements;
- Be proactive within your own entity. Understand when certain business systems may meet thresholds for further scrutiny. Use our recently published business system assessment.
- If the RFP does not require a formally approved system prior to contract award, it is incumbent on the Contractor to ensure their accounting system is properly functioning and ready for audit should they be selected for award;
- If the RFP requires a formally approved system prior to contract award, it is incumbent on the Contractor to schedule an ASR long before procurement response is due when verification and evidence is required to support solicitation requirements;
- Prime Contractors should consider flowing down accounting system requirements, as part of their subcontract monitoring responsibility per FAR 42.202(e)(2) when awarding a cost-type subcontract.
- Subcontractors should understand the accounting system requirements placed upon them by Prime Contractors in relation to the prospective contract type.