In the world of government contracting, the internal procedures that are established are critical for success in fulfilling the contract and passing a DCAA audit. Once procedures have been set-up, maintaining, reinforcing, and adjusting policies to fit your growing company are critical. When it comes to labor costs (and the timekeeping involved in determining those costs) nothing could be more important than establishing the correct record keeping procedures.

According to the DCAA 2016 CAM (Contract Audit Manual):

Labor costs are usually the most significant costs charged to Government

contracts, and usually comprise the base, or the largest element in the base, used for

allocating indirect costs. Historical labor costs are often used to estimate labor for

follow-on or similar item Government contracts. Unlike other cost items, labor is not

supported by third party documentation such as an invoice, purchase order, or receipt.

Contractor personnel have complete control over the documents or devices of original

entry, whether they consist of timecards, electronic media, or some other means.

Responsibility for accuracy is diffused throughout the contractor’s organization.

Consequently, the risks associated with the accurate recording, distribution, and

payment of labor are almost always significant. CAM 5-902

Considering this significant risk involved in timekeeping, managers should run through the following checklist and ask themselves if the following procedures are in place. Every company is different, but it’s important to do a review of your current policies and assess whether what you have in place can actively manage your risk.

1. Do you have a way to monitor your timekeeping system? How are you keeping the overall integrity of your labor system from degrading?

2. What procedures do you have in place to make sure that labor hours are accurate that any and all corrections made to timekeeping records have a paper trail that is documented, authorized, approved, and stored safely?

3. Do you have any employee awareness training programs in place? Are your employees are aware of the importance of charging the proper time to the proper project?

4. Do the procedures you have in place for labor authorizations/approvals enable the correct accrual and recording of costs of labor to cost objectives?

5. When it comes to your labor costs to cost objectives, what procedures for labor distribution do you have in place to ensure they are recorded correctly?

6. Labor transfers and adjustments occur and there must be an effective procedure to assure that they are documented and approved. Do you have an automated or manual system that allows for this?

7. Labor cost accounting needs to have procedures that assure that any labor charges to the government comply with the “promulgated Cost Accounting Standards, generally accepted accounting principles, and contract terms/clauses.” Are you aware of what these standards are, and does your accounting procedure align with it?

8. Is there a separation of responsibilities that creates an effective procedure to assure that there is an preparation of payroll that is independent from payment, and that the rates of pay are accurate and authorized appropriately?

These are basic checklist questions that established and new companies can refer to when preparing for an audit, setting up new procedures, or updating old ones. As companies expand, the initial integrity of procedures can degrade and it becomes necessary to perform an internal review. The best way to have a system that scales to your company is to invest in software that can grow with your company and has the proper DCAA compliant features to automate your timekeeping efforts and reduces the amount of errors and time spent in keeping time.