Which accounting software works best for Department of Defense contractors that provide services and products?
If you're obtaining your contracts through the Department of Defense then all your accounting is reviewed by the Defense Contract Audit Agency (DCAA), the internal agency that audits all defense contracts issued by DoD. Obviously, having an accounting solution that adheres to DCAA standards is going to be one of your top criteria (especially since they legally have access to your internal accounting records at all times!)
On that note you should check out programs like Tenrox Project Management, whose accounting module features full DCAA compliance in addition to SOX (Sarbanes-Oxley).
In addition to Tenrox mentioned below, I would also take a look at Deltek Costpoint, which is built specifically for government contractors and comes with extensive accounting, compliance, and project management features.