10 Key Accounting Challenges Facing Government Contractors

What are the key accounting challenges for government contractors? The complexity comes from strict compliance rules, layered cost structures and constant oversight. Unlike typical commercial projects, your contracts must follow frameworks like the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS) and Defense Contract Audit Agency (DCAA) guidelines.

Staying compliant is an ongoing commitment that evolves with every new regulation and audit requirement. Even experienced contractors struggle to keep up as standards shift and technology advances. To stay ahead, you need disciplined accounting systems and expert partners who understand the intersection of compliance, cost efficiency and strategic growth.

1. Navigating CAS Compliance

CAS compliance allows you to maintain consistency in how you estimate, accumulate and report costs across all your government contracts. These standards promote fairness and transparency by ensuring every cost is treated the same way, no matter which contract it’s tied to. If you’re awarded a contract of $7.5 million or more, it becomes a “trigger” contract that establishes CAS coverage — unless you qualify for an exemption.

This means your entire accounting system must align with CAS rules from that point forward. Misapplying these standards can result in disallowed costs, audit findings or contract disputes that cut into your profits. The best strategy is aligning your internal cost structures and policies with CAS principles early in the contract process, which ensures smooth execution and fewer compliance headaches later.

2. Managing Indirect Cost Rates

Accurate allocation of overhead and general and administrative costs is one of the biggest accounting challenges for government contractors because it determines whether projects stay profitable or fall short. When indirect costs are misallocated, your pricing and billing can quickly go off track, which affects cash flow and compliance. Fluctuating indirect rates make things trickier, especially when you juggle multiple contracts with different cost structures.

To stay in control, regularly review your rate calculations to ensure they reflect your current expenses and workload. Setting up forward pricing rate agreements can give you predictable, approved rates that simplify negotiations and reduce surprises. Many contractors also use automated cost-tracking tools to gain real-time visibility, minimize manual errors and comply with government requirements while protecting profitability.

3. Staying Audit-Ready for DCAA Reviews

The DCAA focuses on internal controls, timekeeping and billing systems because they form the backbone of cost accountability in government contractors. If your documentation is incomplete or employees record time inconsistently, you risk triggering audit findings that can lead to disallowed costs or payment delays. The DCAA expects clear audit trails showing that every hour worked and every expense billed ties directly to a specific contract.

Maintain electronic audit trails and use accounting software designed to meet DCAA requirements. NeoSystems brings deep expertise in this area, offering pre-audit assessments, remediation support and guidance grounded in DCAA best practices. Its team helps you strengthen systems and ensure your accounting infrastructure can withstand the most rigorous audits.

4. Segregating Direct and Indirect Costs

Accurate cost segregation keeps billing precise and compliance spotless, which makes it one of the biggest accounting challenges for government contractors. Clearly separating direct and indirect costs allows you to bill clients correctly and stay compliant with FAR and DCAA standards.

For example, labor hours tied to a specific contract should be recorded as direct costs. At the same time, general materials or subcontractor expenses that support multiple projects belong in indirect pools. Misclassifying these can lead to audit issues, rejected invoices or lost revenue.

Set up a standardized chart-of-accounts mapping that clearly defines each cost category. Regular staff training also helps your team understand how to code expenses properly, which reduces errors and ensures your accounting system consistently meets government requirements.

5. Integrating Project Management and Accounting Systems

When project and accounting data live in separate systems, inefficiencies quickly pile up — manual data entry, duplicate work and reporting delays become everyday frustrations. These silos make it hard to see the full financial picture, often causing missed milestones, inaccurate cost tracking and compliance risks. Enterprise resource planning (ERP) integration becomes crucial in these situations. Unifying project management and accounting workflows can track costs, monitor progress and measure compliance metrics in one place.

Modern ERP platforms with built-in DCAA compliance and real-time visibility help you stay audit-ready while saving hours of administrative effort. NeoSystems has a proven track record in this area, seamlessly linking project data with accounting systems to reduce double work and ensure every transaction aligns with federal compliance requirements.

6. Handling Contract Modifications and Change Orders

Scope changes and contract extensions can easily throw off your revenue recognition and cost allocation, making them some of the trickiest accounting challenges for government contractors. When the project scope expands or timelines shift, you must revisit how you define performance obligations and distribute costs across your contracts. You risk underbilling or misreporting your financials if you don’t track incremental expenses like extra labor, materials or subcontractor work.

Always update your billing baselines to match the new terms and keep detailed records that support every adjustment. Strong project accounting practices are your best defense. They keep your data organized, ensure compliance and help avoid disputes or funding delays. Staying proactive and detail-oriented lets you control your financials no matter how much the contract evolves.

7. Training and Retention in Accounting Roles

The talent gap in government contract accounting is becoming a growing challenge, as experienced professionals are in high demand. When skilled accountants leave, you lose expertise, increase compliance risk and disrupt audit readiness. Inconsistent reporting and weakened internal controls often follow high turnover. 

The best way to stay ahead is to invest in continuous professional education, industry certifications and structured mentorship programs that build long-term capability. NeoSystems helps close this gap by providing access to seasoned GovCon accounting professionals who bring extensive compliance knowledge and hands-on experience. Its teams receive ongoing training and apply robust internal controls, which ensure your accounting operations stay consistent and fully aligned with federal standards.

8. Applying Proper Revenue Recognition Methods

Applying ASC 606 is one of the toughest accounting challenges for government contractors because performance-based contracts rarely follow a simple billing schedule. Instead, you must recognize revenue based on how your team meets specific performance obligations. This becomes more complicated for multi-year projects, milestone-based payments or contracts with variable consideration.

Without careful documentation, it’s easy to run into reporting inconsistencies or audit red flags. The best solution is to align your accounting and project management teams. Collaborating to define and track performance obligations allows you to comply with ASC 606 and create a smoother path to accurate revenue recognition.

9. Adapting to Evolving Regulatory and Reporting Requirements

Federal reporting requirements constantly change, and keeping up with them is a persistent challenge for government contractors. Updates to Uniform Guidance and new expectations for SF-425 financial reports affect how you manage internal controls and prepare for audits. Each policy shift can change how you track spending, document compliance or present performance data to agencies. 

To stay current, regularly monitor updates from the FAR Council and leading professional associations that track federal contracting trends. NeoSystems simplifies this process by maintaining a fully compliant infrastructure and continuously updating systems to reflect the latest regulations. Its proactive approach keeps clients ahead of compliance changes, reduces audit risks and ensures reporting stays accurate.

10. Maintaining Cash Flow Amid Delayed Payments

Lengthy approval cycles and slow invoice reviews can drain your working capital, especially when payments from government agencies take weeks or months to process. These delays strain cash flow and make covering payroll, materials and other ongoing project costs harder.

Consider implementing progress billing to collect payments as work milestones are completed, rather than waiting until the end of the contract. Automating your invoice submissions can also reduce administrative lag and the chance of errors that cause payment holdups. Beyond that, effective forecasting and contingency planning help you manage expenses, anticipate shortfalls and sustain operations during slower pay periods.

Building Strength Through Compliance and Strategy

Accounting for government contractors is as much about compliance as it is about gaining strategic insight to drive smarter business decisions. Overcoming the many accounting challenges for government contractors requires building systems that enhance visibility and long-term efficiency. Investing in modern accounting software, ongoing training and proactive audit preparation can strengthen compliance while turning your financial data into a tool for growth and performance.