Key Takeaways
- Government contracting accounting requires strict compliance with DCAA and DFARS standards to avoid payment delays or audit issues.
- Cost allocation, timekeeping, and indirect rate management are key pressure points that demand accurate systems and documentation.
- Using generic accounting software can lead to noncompliance – GovCons need purpose-built or integrated ERP systems.
- Building ICE schedules and reconciling ledgers throughout the year reduces errors and supports timely incurred cost submissions.
- Providers like NeoSystems, Unanet, and PROCAS offer specialized accounting systems and support tailored for government contractors.
Government contracting looks lucrative until you see the fine print. The rewards are real, yet the financial rules are long and notoriously complex. Accounting challenges for government contractors can feel like a field of compliance landmines, where one wrong step can trigger payment holds, failed audits or contract termination.
This guide lays out five critical trouble spots and points you to three companies that can help contractors build systems, achieve compliance readiness and keep cash flowing.
What Are the Key Accounting Challenges for Government Contractors?
When it comes to accounting for GovCons, the rules are different and standard business practices won’t solve issues. Think in terms of systems. Your chart of accounts, cost pools, timekeeping, indirect rates and reports should work together for a seamless workflow. These five “landmines” are what auditors usually test first.
1. DCAA Compliance Failures
The Defense Contract Audit Agency is the gatekeeper and is responsible for auditing GovCons and ensuring that taxpayer money is spent correctly. If your system fails to meet core criteria in DFARS 252.242-7006, contracting officers may suspend payments or disapprove your system, which can delay awards and cash flow.
You can address this by mapping your process against the 18 accounting-system criteria, fixing gaps and documenting how you meet each requirement. Evidence should be current because DCAA uses risk-based sampling and may revisit areas it previously flagged.
2. Improper Cost Allocation
In government contracting, every dollar must be classified correctly. You have direct costs, which are chargeable to one contract, indirect costs, like utilities or rent, and unallowable costs, which the government will not reimburse, like lobbying, entertainment or bad debts. Misallocations can inflate indirect rates, trigger disallowances and raise false claims risks.
What can you do? Define your pools, set the allocation flow in writing and train staff on terminology. Review this monthly to prevent errors from snowballing into an Incurred Cost Submission (ICS) problem. For small businesses, the U.S. Department of Labor’s indirect rate guide is a helpful plain-language reference for building sound pools and bases.
3. Inadequate Timekeeping and Labor Reporting
The government is exceptionally strict about how you monitor employee hours because labor is often the single biggest expense on a contract. In fact, DCAA conducts unannounced labor floor checks to verify this and identify any potential red flags.
Using a generic timekeeping app or a spreadsheet is basic, but you need a system that can track every hour worked against the correct project or cost objective in real time. Such a system should have specific audit trail capabilities. Train employees on the importance of tracking this to the letter, and then conduct spot checks on charges before every billing cycle.
4. The ICS Puzzle
If you have cost-reimbursable work, you submit an annual ICS to finalize indirect rates for the prior year. This report is a complex series of schedules that verifies your actual costs for the year against the provisional rates billed.
The DCAA ICE model includes detailed schedules that must reconcile with your ledgers, billings and job cost reports. Late, inaccurate or incomplete submissions may result in penalties and prolonged closeouts. To address this, build your ICE schedules as you go, not at the year’s end, and check provisional billings, funding limits and indirect rate carry-forwards every month.
5. Relying on a Generic Accounting System
Many small businesses attempt to manage their GovCon operations using a basic QuickBooks subscription, but this can lead to a critical error. Such generic systems are not designed to meet core government requirements. DFARS 252.242-7006 makes the accounting system a contractual obligation. If yours cannot meet the system’s criteria, a contracting officer can withhold payments until fixes are in place.
Best Firms to Handle Accounting for Government Contractors
You can build a compliant back office in-house, but many contractors streamline the process with specialized providers. Three stand out. This list was curated based on specific criteria to ensure that companies can deliver real solutions for GovCons, particularly in guiding clients through DCAA reviews, ICS preparation and business system audits.
NeoSystems
NeoSystems provides managed back-office services for GovCons and specializes in accounting, HR and IT with deep Deltek Costpoint expertise. It offers outsourced accounting services that carry the day-to-day burden, secure hosting for leading ERPs, and consulting for DCAA audit preparation and business system reviews.
NeoSystems is Deltek’s only Platinum partner with broad implementation and integration experience. If your back office is strained by government contract rules, its team can take the work off your plate, so you can focus on winning new contracts and improving your bottom line.
Unanet
Unanet develops purpose-built ERP software designed for GovCons and project-based businesses. It offers a single system for financials, project management, timekeeping and reporting that helps align DCAA-focused controls for labor and cost allocation.
Its features are built from the ground up and are meant to eliminate the need for multiple disconnected tools. Unanet’s comprehensive resource planning and analytics capabilities also help leaders see project health and indirect rate impact in one view.
PROCAS
PROCAS serves small and midsized GovCons with DCAA-focused accounting software and outsourced services. It provides a user-friendly web-based tool and is designed to serve as an accessible entry point for businesses that need to achieve compliance readiness without a significant upfront investment.
Top GovCon Accounting Firms Comparison Table
Here’s an at-a-glance take on how these companies position themselves to help:
| Company | Primary Service Model | Target Customer |
| NeoSystems | Managed services and consulting | Mid-to-large GovCons seeking to outsource their back-office work |
| Unanet | All-in-one ERP software | GovCons of all sizes wanting a single, integrated platform |
| PROCAS | Accounting software and services | Small-to-midsized GovCons needing a compliant and affordable solution |
Don’t Let Your Business Get Sidelined
The accounting challenges government contractors face are significant, but they are entirely avoidable. These landmines only detonate when they are ignored, so be proactive. Assess your accounting system, timekeeping, cost pools and ICE schedules, then adopt a tailored solution or work with a trusted partner so your team can focus on delivery and growth in the federal market.
FAQs
What is DCAA compliance and why is it important?
DCAA compliance ensures a contractor’s accounting system meets federal standards for accuracy, transparency, and cost control. Noncompliance can delay payments or cause contract disapproval.
How can small businesses manage cost allocation properly?
Define cost pools clearly, document your allocation process, and review classifications monthly. Training staff on terminology and indirect rate tracking is essential for accuracy.
Why is timekeeping such a big deal in government contracting?
The government closely monitors labor charges since they are major contract expenses. Proper timekeeping systems must link hours to specific projects with detailed audit trails.
Can I use QuickBooks for government contract accounting?
Generic accounting tools like QuickBooks are not DCAA-compliant out of the box. GovCons typically need specialized systems or integrations to meet audit and reporting standards.
Which accounting providers specialize in GovCon compliance?
NeoSystems, Unanet, and PROCAS are leading firms offering DCAA-ready software, consulting, and managed services to help contractors meet compliance and audit requirements.