Government contractors are heavily regulated across all industries and often have a siloed approach to compliance, which now presents a material risk as regulatory requirements increasingly overlap. Between Defense Federal Acquisition Regulation Supplement (DFARS) requirements, Cybersecurity Maturity Model Certification (CMMC) enforcement and increasing scrutiny from the Defense Contract Audit Agency (DCAA), the compliance landscape is converging, requiring chief financial officers (CFOs) and controllers in this space to operate differently.
For many, these reporting obligations have historically been treated as separate workstreams with finance modernization on one track and cybersecurity readiness on another. With evolving requirements, organizations must now align financial systems modernization, business systems compliance and cyber readiness efforts into a single, coordinated enterprise resource planning (ERP) strategy to mitigate compliance risk, streamline audit processes and improve competitiveness for high-value Department of Defense (DoD) contracts.
The Convergence of DFARS, CMMC and Financial System Requirements
DFARS clauses govern the adequacy of contractor business systems, including accounting, estimating, purchasing and property management. The CMMC acquisition rule under 48 CFR requires contractors handling federal contract information (FCI) or controlled unclassified information (CUI) to meet specific cybersecurity maturity levels as a condition of contract award. Meanwhile, DCAA compliance expectations around cost accounting, indirect rate structures and incurred cost submissions demand accounting systems that produce reliable, auditable data on an ongoing basis.
The systems, controls and processes a contractor uses to manage financial data must also support cybersecurity requirements — and vice versa. A modernization initiative that addresses only one dimension introduces control gaps in the other.
Why Legacy Systems Create Risk for Government Contractors
Many government contractors continue to rely on legacy financial systems and manual processes that were adequate for a less complex regulatory environment. While these systems may feel "good enough," they often carry hidden costs that surface in lost contract opportunities, audit findings and operational inefficiency — and the problem is more common than many realize.
Cherry Bekaert's Middle Market CFO Survey found that 34% of all CFOs still depend on manual processes for audit preparation, and more than half cite data accuracy as a significant hurdle. In a government contracting environment where DCAA audits and CMMC requirements demand precision, those gaps create disproportionate compliance risk.
Cost Accounting and Indirect Rate Integrity
For contractors with cost-reimbursable contracts, indirect rate calculations pull data from across the organization — labor, overhead, general and administrative costs, and fringe benefits. When underlying financial data is not well maintained or reconciled monthly, indirect rates may fail to accurately reflect the contractor's true cost structure. This creates risk during DCAA audits and can delay the annual incurred cost submission, which is due six months after the contractor's fiscal year end.
Without a robust and disciplined monthly close process, management may also be making financial and operational decisions based on information that does not accurately reflect revenue, expenses or project-level profitability.
Real-time Contract Profitability Visibility
Government contractors need to track costs at the contract level to monitor profitability, manage budgets and report accurately to stakeholders — whether that is the government, a lender, investors or an audit team. Legacy systems that rely on manual data extraction and spreadsheet-based reporting introduce delays and increase the likelihood of errors.
Modern approaches — including automated dashboards and tools like Power BI — can pull data directly from the ERP to generate real-time visibility into indirect rates, contract performance and financial covenants. This reduces the manual effort of pulling balance sheets and income statements into Excel and reworking calculations, replacing them with on-demand outputs for the specific audience that needs them.
Cyber Vulnerabilities From Unsupported Systems and Manual Processes
Legacy systems that are no longer actively supported by vendors may lack current security patches, creating entry points for cyber threats. Additionally, manual processes, such as spreadsheet-based tracking of sensitive contract or financial data, can significantly increase the risk of exposure to sensitive data that undermine CMMC compliance.
As contractors modernize their financial systems, they have a critical opportunity to embed cybersecurity requirements into the architecture from the outset rather than treating CMMC as a separate, parallel initiative. This is especially important for contractors handling CUI, which will typically require self- or third-party assessments.
How a Modern ERP and Secure Architecture Support Growth
Financial modernization is not limited to technology upgrades; it requires rethinking how people, processes, data and technology come together to create a financial infrastructure that supports compliance, enables better decision-making, and positions the government contracting organization for growth.
Faster Audits and Incurred Cost Submissions
A well-implemented ERP environment with strong monthly close discipline means the data needed for a financial statement audit, a DCAA audit or an incurred cost submission is available and reliable at any point during the year — not something that has to be assembled under pressure at year-end. Hard monthly closes ensure that information for audits, bank reporting, investor updates and government submissions is consistently up to date, reducing the risk of late or inadequate submissions.
Stronger Internal Controls: A "SOX-lite" Approach for Government Contractors
Public companies are subject to the full rigor of Sarbanes-Oxley (SOX) internal controls; however, most government contractors are privately held and not subject to SOX. Still, adopting a risk-focused subset of those controls — sometimes referred to as "SOX-lite" — can significantly strengthen audit readiness and operational discipline.
SOX-lite refers to the selective implementation of certain internal controls based on risk and practicality rather than applying the extensive, formal framework required of public companies. The table below highlights the key differences:
|
Area |
Full SOX |
SOX-lite |
|
Scope |
Extensive (all key processes) | Risk-focused (critical areas only) |
|
Documentation |
Heavy, formal | Lean, practical |
|
Testing |
Annual full testing + external attestation | Limited or internal review |
|
Cost |
High | Moderate/efficient |
|
Objective |
Regulatory compliance | Control discipline + audit readiness |
For government contractors, SOX-lite controls strengthen areas such as segregation of duties, access controls over financial systems, reconciliation procedures and documentation standards — all of which support a favorable outcome in pre-award and post-award accounting system audits.
Bid Competitiveness for DoD Contracts
For contractors pursuing DoD work, demonstrated system readiness is a prerequisite. The government evaluates the adequacy of accounting systems through the SF 1408 pre-award survey before awarding cost-type contracts, and a valid CMMC status is increasingly required as a condition of contract award. Contractors with modern, well-integrated systems and demonstrated cybersecurity maturity are better positioned to achieve CMMC status and compete for higher-value work. Furthermore, contract award success depends not only on system readiness, but also on the ability to consistently produce reconciled, evidence-driven, and audit-ready support throughout contract performance and billing (post-award).
At the same time, the DoD’s increasing emphasis on fixed-price contracting, reinforced by recent executive actions, is reshaping how contractors must approach estimating and pricing. In this environment, ERP systems extend beyond compliance and audit readiness, becoming critical to developing precise, defensible and competitive cost estimates upfront. Contractors must be able to leverage real-time, historically validated cost data across labor, materials, and indirect structures to inform pricing decisions that balance competitiveness with margin protection.
Without a well-integrated system, estimating efforts often rely too heavily on manual adjustments and judgment, increasing the risk of underbidding, margin erosion or performance challenges. A modern ERP environment strengthens the connection between historical actuals and forward-looking estimates, aligning pricing strategies with how the government evaluates price reasonableness and risk under fixed-price awards.
A Practical Roadmap: Where Should Government Contractors Start?
Financial modernization does not need to be an all-at-once transformation. A phased, practical approach aligned to the contractor's current state, risk profile, and growth objectives is more sustainable and effective. The following roadmap provides a starting framework.
1. Assess Your Current Systems, Processes and Controls
Evaluate your existing ERP environment, accounting processes and internal control framework. Identify where gaps exist in DCAA compliance, data quality, monthly close discipline and system integration. Concurrently, determine your CMMC scope including what data types you handle (FCI vs. CUI) and what CMMC level applies.
At this stage, many organizations fall into the trap of focusing too quickly on system selection. Leading with technology before fully understanding processes, controls and data flows can result in a well-built system that is not aligned to how the business operates.
2. Strengthen Your Financial Close and Control Environment
Implement or refine a monthly hard close process to ensure financial data is accurate, reconciled and audit-ready at any point during the year. Establish SOX-lite controls around critical areas such as access management, segregation of duties, cost allocation and journal entry review.
This step also requires a realistic view of data quality. Modernization alone cannot fix inconsistent or poorly structured data. Without discipline around data governance and reconciliation, the same issues will persist in a new system.
3. Optimize or Implement the Right Technology and Partner
Ensure your ERP and supporting systems (payroll, timekeeping, contracts management) are integrated and configured to meet FAR and DFARS requirements. For contractors that already have an approved system in place, the focus may be on optimization — ensuring the system is used to its full capability — rather than replacement. Automate where possible, particularly for indirect rate calculations, financial reporting and covenant tracking.
Integration and implementation are critical at this stage. Disjointed systems create data silos, while a poorly executed implementation — whether due to inexperience with government contracting requirements, lack of integration planning or selecting the wrong implementation partner — can quickly undermine the benefits of modernization. In practice, this is where many initiatives stall or go off track, as even a well-selected system depends on the quality of its implementation to deliver value.
4. Embed Cybersecurity into the Modernization Effort
Do not treat cybersecurity readiness as a separate initiative. As you upgrade or optimize financial systems, incorporate security controls, access management and data protection requirements into the architecture. This ensures your modernized environment supports both financial and CMMC compliance requirements.
A common misstep is addressing CMMC as a documentation exercise rather than an operational one. Defining scope early, particularly whether contracts involve FCI, CUI or both, is essential to avoid over-engineering controls or missing critical requirements altogether.
5. Invest in People and Change Management
Equip your team with the skills and training needed to operate effectively within the modernized environment. A modern system with the wrong team around it — or without adequate training — will not deliver the intended results.
Change management is often underestimated. Training should be ongoing and tailored to specific roles, ensuring that processes, controls and systems are consistently applied across the organization.
Your Guide Forward
Contractors that approach financial modernization and cyber readiness as integrated enablers of growth, rather than as separate compliance obligations, gain a measurable competitive advantage in today's government contracting environment. The cost of inaction is no longer limited to inefficiency — it increasingly includes lost contract eligibility.
Cherry Bekaert’s Government Contracting Assurance and Consulting advisors work at the center of this effort, helping contractors design and sustain compliant, audit-ready financial environments. Our team integrates cross-functional capabilities across the broader functions of the Firm, including CMMC Consulting and Digital Advisory professionals, to align financial systems, business processes and cybersecurity controls into a practical, integrated framework. Whether you are modernizing your ERP, preparing for a DCAA audit or pursuing CMMC (self-or third-party assessed), we can help you build a clear path forward.
