FAR Federal Acquisition Regulation Accounting Requirements

FAR Federal Acquisition Regulation Accounting Requirements (What US Government Contractors Must Have)

FAR accounting requirements are the rules that determine whether your costs can be billed, audited, and accepted on US federal contracts, especially cost-reimbursement, time-and-materials (T&M), labor-hour, incentive, or other contract types where the government expects cost visibility. In simple terms: the FAR sets the standards for (1) what costs are allowable, (2) how costs must be tracked and allocated, and (3) how long you must retain records so auditors can verify your claims.

When FAR accounting requirements matter most

If your contract includes clauses that reimburse costs or permit billing based on incurred costs, your accounting system has to support government auditability. The most common triggers are:

• Cost-reimbursement contracts (where you invoice allowable costs and later settle final indirect rates)
• T&M / labor-hour contracts (where labor and indirect structures are scrutinized)
• Negotiated awards where cost analysis is performed (even for some fixed-price scenarios)

The three pillars of FAR accounting compliance

1) Cost allowability and FAR Part 31 discipline

FAR Part 31 is the backbone of “allowable vs unallowable” cost treatment. Your accounting must be able to:

• Identify costs as allowable, allocable, and reasonable (and consistent with contract terms)
• Segregate unallowable costs so they do not enter billings, proposals, or indirect pools improperly
• Maintain documentation that supports why a cost was incurred and how it benefits the contract work

This is where many contractors fail: unallowable costs are not always “fraud.” They are often routine expenses that simply cannot be billed to the government unless handled correctly through accounting segregation and policy controls.

2) Audit-ready records and traceability

Government contracts often include audit rights that allow the Contracting Officer (or authorized representatives) to examine records sufficient to support costs claimed. Practically, that means your system must produce a clean trail from:

• Timesheets and vendor invoices → job cost ledgers and cost objectives → general ledger totals → invoices submitted to the government

If an auditor cannot reconcile billed costs back to source documentation and accounting books, costs can be questioned or disallowed.

3) Records retention under FAR Subpart 4.7

FAR Subpart 4.7 sets the policy and specific retention periods for different record categories. This is not optional housekeeping. If your contract has audit clauses, you must retain supporting documentation for prescribed periods, and in some cases retention periods can extend (for example, if final indirect rate submissions are late). Your compliance posture depends on having a defensible retention schedule for payroll/timekeeping records, cost accounting records, and acquisition/supply records.

The clauses that drive “real” accounting obligations

While FAR Part 31 sets cost principles, your contract clauses determine how those principles become operational:

• Allowable Cost and Payment drives invoicing and final rate settlement mechanics for cost-type contracting.
• Audit and Records drives access to, scope of, and expectations for underlying books and records.
• For DoD awards, DFARS can impose additional “acceptable accounting system” criteria, including segregation of direct vs indirect costs, job cost accumulation by contract, indirect allocation logic, and reconciliation to the general ledger.

A practical FAR accounting readiness checklist (use this before you bid)

System structure

• Chart of accounts supports contract-level cost collection
• Job cost ledger ties to the general ledger and reconciles monthly
• Direct costs are segregated from indirect costs consistently

Timekeeping and labor

• Written timekeeping policy (daily entry, supervisor review, change controls)
• Labor distribution ties hours to contracts and cost objectives
• Overtime and premium pay treatment is defined and consistent

Indirect rates and allocations

• Defined indirect pools and bases (fringe, overhead, G&A)
• Consistent allocation methodology and documented rationale
• Monthly indirect rate monitoring and variance explanation

Unallowable cost controls

• Unallowable cost accounts or project codes exist
• Expense review process flags entertainment, lobbying, alcohol, bad debts, and other common unallowables
• Executive training: people know what “unallowable” means operationally

Billing and audit pack

• Invoice package includes backup trail (labor, subcontract, ODCs)
• Subledger-to-GL reconciliation is provable
• Record retention schedule is implemented (not just written)

Mini templates your team can implement immediately

Unallowable Cost Log (simple format)

• Date | Vendor/Employee | Description | Amount | Reason Unallowable | Account Code | Corrective Action

Monthly Contract Cost Reconciliation

• Contract | Direct Labor | Direct Materials | ODCs | Subcontracts | Indirect Applied | Total to Date | GL Tie-Out Reference

Audit Response Folder Structure

• Contract folder → invoices → timesheets → payroll registers → vendor invoices → PO/subcontract files → rate calculations → reconciliations → policies

If your accounting system can consistently produce these artifacts with clean tie-outs, you are materially closer to meeting FAR accounting requirements and surviving real audit scrutiny without disruption.

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Sources

https://www.acquisition.gov/far/part-31 https://www.acquisition.gov/far/52.216-7 https://www.acquisition.gov/far/52.215-2 https://www.acquisition.gov/far/subpart-4.7 https://www.acquisition.gov/far/4.705 https://www.acquisition.gov/dfars/252.242-7006-accounting-system-administration. https://www.law.cornell.edu/cfr/text/48/52.215-2 https://www.ecfr.gov/current/title-48/chapter-1/subchapter-A/part-4/subpart-4.7/section-4.705-2