Accurate labor distribution anchors the reliability of every financial figure reported under federal contracts. Government auditors closely monitor the recording, categorization, and assignment of labor, as any inaccuracies in these processes can influence indirect rates, billing, and audit outcomes.
Organizations that support federal programs benefit from a framework that aligns daily timekeeping habits with regulatory expectations so labor data flows cleanly into cost accounting, pricing support, and financial reporting.
A clear structure at the outset provides consistency, strengthens audit readiness, and supports sound decision-making as contract portfolios expand.
In This Article: Readers gain a clear look at how structured timekeeping, accurate labor classification, and integrated accounting processes support reliable labor distribution for government contractors.
A Clear Framework For Recognizing Direct & Indirect Labor
Strong labor distribution begins with a sound cost structure that distinguishes direct labor tied to specific contracts from indirect labor supporting the overall organization.
FAR 31.202 defines direct labor as work directly associated with a final cost objective, whereas FAR 31.203 categorizes administrative, supervisory, and support activities as indirect costs that benefit multiple cost objectives.
Organizations performing government work gain consistency when charge codes, labor categories, and pool definitions align with these principles, since auditors routinely compare labor allocation practices to written policies.
Clear guidance provided to employees on where work should be charged, combined with periodic review of labor patterns against job descriptions and project assignments, reduces the likelihood of misclassification that may lead to questioned costs under FAR 31.201-2 and FAR 31.205-6.
Integrated Timekeeping & Labor Distribution Processes That Hold Up Under Scrutiny
DFARS 252.242-7006 and repeated DCAA guidance emphasize the expectation that timekeeping and labor distribution operate as a single, integrated control environment.
An effective system captures hours at the employee level each day, then routes approved time directly into the labor distribution process without detours through offline spreadsheets. When configured properly, the flow begins with daily time entries, proceeds to supervisory review, and then automates posting to job cost records and indirect pools under general ledger control.
Auditors frequently test this chain by comparing timesheets, labor distribution reports, and payroll registers, so organizations benefit when mapping tables, rate structures, and charge codes are consistently maintained.
A well-designed workflow minimizes manual journal entries, limits administrator intervention, and leaves a clear trail that auditors can follow from source to financial statement.
Strong Timekeeping Habits That Support Reliable Labor Charging
DCAA floor checks and real-time labor evaluations reveal how investigators verify labor practices, often through unannounced employee interviews in which individuals describe current assignments and confirm the accuracy of recorded hours.
Daily, employee-entered time with certification is central to these reviews, and DCAA materials repeatedly emphasize that timesheets must accurately reflect the actual work performed. Supervisors also play a meaningful role, evaluating the reasonableness of recorded hours in relation to assignments, project funding, and the expected workload.
Organizations benefit when corrections follow a documented process initiated by employees, approved by supervisors, and logged in the system with complete audit trails.
Remote work does not alter these expectations, and auditors continue to request policies that describe how employees working from home record their time, how supervisors verify activity, and how exceptions are addressed.
Practical Treatment Of Frequent Labor Challenges Seen In Federal Audits
Labor distribution often encounters complex situations such as uncompensated overtime, idle time, and activities subject to specialized cost principles such as training, bid and proposal work, or selling functions.
FAR 31.205-6 requires that exempt employees receive compensation considered reasonable in relation to the hours worked, and many contractors adopt effective hourly-rate approaches to consistently account for uncompensated overtime.
Idle time must be handled thoughtfully, since extensive charging of idle hours directly to a contract may conflict with reasonableness standards, while indiscriminate shifting to indirect pools can distort rates.
Activities such as training, proposal preparation, and business development require separate charge codes that map to appropriate pools, because FAR 31.205-18 and related rules establish distinct treatment for these costs.
Periodic analysis of these categories helps maintain alignment with written policy and reduces the risk of leakage into direct contract labor.
Data Integration & Reconciliation Practices That Strengthen Audit Readiness
A strong labor distribution system produces reliable numbers only when downstream integration remains tight and consistent. Approved time should flow into labor cost calculations using current rate tables that reflect payroll practices and proposal assumptions.
Those results then feed job cost records and indirect accounts, leaving totals that reconcile cleanly to payroll registers and the general ledger. DCAA fraud scenarios often begin with mismatches among these sources, particularly when hours recorded in timekeeping fail to align with the actual distribution of labor or payroll.
Monthly reconciliations that compare timekeeping totals, labor distribution hours, payroll data, and posted general ledger entries help identify discrepancies early, especially in environments with significant overtime, frequent reassignments, or rapidly changing contract portfolios.
Exception reporting that highlights unusual patterns provides management with a clearer view of potential mischarging risks or systemic configuration issues.
Outsourced DCAA Support That Strengthens System Design & Ongoing Oversight
Organizations frequently rely on outsourced accounting specialists to configure cost structures, maintain system mappings, and monitor ongoing labor activity in alignment with DFARS and FAR expectations.
Experienced providers design charge codes and indirect pools that accurately reflect regulatory definitions, configure timekeeping platforms to produce defensible audit evidence, and run reconciliations that compare timekeeping, labor distribution, payroll, and general ledger data.
Audit preparation is another significant advantage, since DCAA’s real-time labor evaluations, floor checks, and accounting system reviews follow predictable patterns. Providers familiar with these processes assemble policies, labor reports, employee listings, and reconciliation workpapers in advance, which reduces internal workload during inquiries.
A strong partnership between operational management and accounting specialists helps create a consistent environment where policy, practices, and system data align, resulting in labor distribution records that withstand detailed federal oversight.
Strengthening Labor Distribution Practices For Organizations
Stronger labor distribution systems support reliable rates, clearer reporting, and smoother audit interactions, particularly for organizations managing complex federal requirements. A well-structured mix of policies, timekeeping habits, and integrated accounting processes offers a foundation that aligns daily activity with federal expectations and reduces the likelihood of questioned costs.
Diener & Associates applies decades of experience, close community engagement, and a longstanding advisory approach to help organizations build confidence in these controls and maintain dependable financial practices.
For guidance rooted in hands-on government contracting experience, schedule a consultation online or reach out to (703) 386-7864 to connect with our professional team of CPAs at Diener & Associates for consulting and accounting services.