When the Criteria Apply
DFARS 242.7503 directs contracting activities to use the clause at 252.242-7006 when contemplating cost-reimbursement, incentive-type, time-and-materials, or labor-hour contracts, as well as contracts with certain progress payments based on costs incurred or percentage or stage of completion. :contentReference[oaicite:2]{index=2}
The contractor is responsible for establishing and maintaining an acceptable accounting system. Under the current clause, failure to maintain an acceptable system can result in disapproval and, when the contract includes the applicable Contractor Business Systems clause, withholding of payments. :contentReference[oaicite:3]{index=3}
Core Cost Accounting Criteria
The criteria establish a control framework for how contractors accumulate, classify, allocate, and report contract costs. Important requirements include maintaining a sound internal control environment, separating direct and indirect costs, accumulating direct costs by contract, and using a logical and consistent method for allocating indirect costs to cost objectives. :contentReference[oaicite:4]{index=4}
- General ledger control: Costs must accumulate under general ledger control, with subsidiary cost ledgers and cost objectives reconciled to the general ledger.
- Contract cost identification: Direct costs must be identified and accumulated by contract, with contract line-item identification when required.
- Indirect cost allocation: Indirect costs require a logical and consistent accumulation and allocation methodology.
- Adjusting entries: Adjustments must receive appropriate approval and documentation.
- Management review: Reviews or internal audits must evaluate compliance with established accounting policies and practices.
Labor, Allowability, and Billing Requirements
Labor accounting is a central part of the criteria. The system must identify employee labor by intermediate or final cost objectives and distribute direct and indirect labor to the appropriate objectives. It must also determine, at least monthly, the costs charged to contracts through routine posting of the books of account. :contentReference[oaicite:5]{index=5}
Contractors must exclude costs that are not allowable under FAR Part 31 and other applicable contract provisions. The system must also support cost information required by applicable contract clauses, including requirements concerning limitation of cost, limitation of funds, and allowable cost and payment. :contentReference[oaicite:6]{index=6}
Billings must be reconcilable to cost accounts for both current and cumulative amounts claimed and must comply with contract terms. This connection between accounting records and billing is important because it allows financial claims to be traced back to supporting cost information.
For period-end activities, accounting controls should also support accrual discovery, estimation, booking, reversal, GRNI, cut-off, and month-end expense recognition so contract and financial records remain current.
Indirect Rates, Revenue, and Contract Data
The system must maintain cost accounting information that allows indirect cost rates to be readily calculated from the books of account. This requires consistent treatment of cost pools, allocation bases, direct costs, and indirect costs across applicable contracts and cost objectives. :contentReference[oaicite:7]{index=7}
Contractors should also maintain adequate and reliable data for pricing follow-on acquisitions. Acquisition Criteria can provide a broader framework for evaluating financial and operational requirements when organizations assess systems, processes, or investments supporting contract work.
Financial reporting processes should distinguish cost accumulation requirements from revenue-related accounting requirements. Revenue Recognition Criteria provide a separate framework for determining when revenue information is appropriately recognized and presented in financial reporting workflows.
ERP Controls and System Implementation
Meeting the criteria is not limited to a particular accounting application. A contractor's accounting system can include multiple connected systems and subsystems, provided the overall environment produces accurate, timely, traceable, and controlled financial information.
When evaluating an ERP environment, the Cloud ERP System Evaluation Checklist: Guide for 2026 can help teams assess ERP functionality, integration, migration requirements, and finance-process capabilities. The key consideration is whether the resulting architecture preserves required cost classifications, contract information, approvals, reconciliations, and audit evidence.
For example, organizations using netsuite should evaluate whether ERP integrations preserve GL structures, contract dimensions, transaction attributes, and supporting records required for government-contract accounting.
Automation can also support controlled finance workflows. The Hyperbots Platform applies agentic AI to finance and accounting tasks, including document processing and ERP integration, while accounting teams retain defined control and review processes.
Procurement, Invoices, and Supporting Controls
Purchasing transactions ultimately affect contract cost records, so procurement controls should connect requisitions, approvals, commitments, receipts, invoices, and accounting entries. A purchase order should provide traceable support for the underlying procurement transaction and its subsequent accounting treatment.
Vendor-facing workflows can further support transaction visibility. A Vendor Portal can allow vendors to track invoice and purchase-order status, review transaction history, and communicate with accounting through controlled workflows.
Approval workflows should be aligned with documented Approval Criteria so transaction authority corresponds to responsibilities, monetary thresholds, organizational structures, and contract requirements.
Review, Findings, and Corrective Action
DFARS 242.7502 states that the contracting officer, in consultation with the auditor or functional specialist, determines accounting-system acceptability against the criteria in 252.242-7006. Findings are documented and material weaknesses are communicated to the contractor. :contentReference[oaicite:8]{index=8}
Under the current January 2025 clause, a contractor generally has 30 days to respond in writing to an initial determination identifying material weaknesses. Following a final determination, the contractor has 45 days either to correct the weaknesses or submit an acceptable corrective action plan with milestones and actions to eliminate them. :contentReference[oaicite:9]{index=9}
A practical review should therefore connect each criterion to documented policies, system configurations, transaction evidence, reconciliations, management reviews, and corrective actions. This creates a clear trail from the requirement to the control and ultimately to the financial record.
Summary
DFARS 252.242-7006 Accounting System Criteria establish the control and accounting requirements for an acceptable contractor accounting system. The criteria cover cost classification, contract accumulation, indirect allocation, general ledger control, labor, allowability, billing reconciliation, indirect rates, follow-on pricing data, and applicable accounting standards. A well-controlled system connects these requirements to documented procedures, reliable ERP data, review processes, and traceable financial reporting.