The Defense Contract Audit Agency (DCAA) dictates the standards that determine the compliance status of government contractors, which directly impacts their ability to retain contracts.
Non-compliance can result in contract termination, debarment, or even legal penalties, which is why understanding the relevant regulations, and training staff on DCAA standards, are vital processes for any contractor.
In addition to accounting processes, the DCAA checks a contractor’s timekeeping procedures to make sure they align with Federal Acquisition Regulations (FAR) and the Fair Labor Standards Act (FLSA).
Continue reading to learn more about DCAA timekeeping standards and how contractors can audit-proof their timekeeping workflows to maintain federal and industry-compliant records.
What Do DCAA Timekeeping Audits Evaluate?
According to the relevant FAR and FLSA standards, DCAA auditors review the timekeeping workflows of government contractors to protect employees from unfair or unethical practices, protect contractors from liabilities, and ultimately, determine which businesses should retain their contracts.
Consider these steps to audit-proof your record maintenance workflow for DCAA timekeeping standards:
Accurately Segregate Labor
For government contractors, labor records must be separated between indirect and direct labor. This is the basic distinction between them:
- Indirect labor facilitates business operations or multiple contracts without directly impacting production. Examples include administration, maintenance, and management.
- Direct labor is directly involved in production, including the manufacturing and delivery processes.
Commercial businesses tend to combine direct and indirect labor costs on their general ledgers; however, DCAA timekeeping standards require them to be separated for government contracts.
The purpose of this is to compare cost objectives and estimates with actual labor costs, itemized between different projects, and general administration versus production costs.
Clearly Identify Labor Distribution
DCAA auditors identify labor costs and track them through the timekeeping records for each contract. Contractors must clearly record how labor is distributed between projects and tasks to create a transparent paper trail for the DCAA to confirm.
This means allocating labor hours with specific dates, project details, and tasks. Work orders must be tracked to each contract separately to help auditors determine how the business’s labor distribution impacts its cost objectives.
Clear employee identification also helps auditors match the payroll records to the individual. Labor cost attribution is a major aspect of the DCAA audit; employee numbers help the auditors verify the cost estimates against the timekeeping records for each worker, a painstaking task without the contractor’s assistance.
Establish Effective Controls
Timekeeping controls help contractors prevent inaccuracies and reduce liabilities, such as by restricting system access. Liabilities are less likely if only relevant personnel can view or alter timekeeping records.
As many businesses migrate their timekeeping workflows to digital solutions, password-protected networks have become a necessity to prevent record falsification, theft of employee information, and other liabilities.
With accurate internal controls, contractors can create transparent audit trails for the DCAA auditors to follow. An experienced CPA can help advise contractors on how to establish these controls and deploy the training workflows needed to keep employee timekeeping practices transparent.
Maintain Regulatory Compliance
FAR, FLSA, and state labor laws define compliant timekeeping practices for contractors. To avoid legal penalties, businesses must adhere to these standards, which include:
- Tracking and paying overtime
- Accounting for breaks
- Adhering to minimum wage laws
- Assigning appropriate vacation time
- Providing benefits such as sick leave and maternity leave
Auditors examine the status of your employees’ benefits, compare their wage records to minimum wage laws, and make sure that you are following the overtime requirements for your state.
Verify Supervisor Oversight
The DCAA will check for prudent supervisor oversight of labor hours recorded by employees per project and per contract. Before the auditors examine the records, supervisors should review and authorize time entries, checking for these factors:
- Accurate accounting of time and leave taken, including whether leave was taken with supervisory approval and accurately tracked
- Prompt management of exceptions, such as unexcused absences, which should not make it to payroll before supervisor intervention to avoid unnecessary timecard adjustments
- Overtime tracked according to FLSA standards and state mandates, including approving prior authorization for employees to work over the limit in a given week and preventing employees from holding and reattributing work hours to achieve overtime status
- Accurate leave approval, which includes authorizing time-off requests and sorting out missed punches as unapproved leave
Outline Timekeeping Procedures
Contractors should clearly outline their timekeeping procedures for both managers and auditors to follow. Written guidance should be available and outlining labor approval processes, correction procedures, regulations, and other timekeeping expectations to keep accounting staff informed of the relevant standards and make the auditor’s job easier.
Contact Diener & Associates for Expert Timekeeping Management Services
Record maintenance remains a major regulatory compliance pain point for government contractors preparing for DCAA audits. DCAA timekeeping standards include federal, state, and industry-specific regulations that contractors are responsible for maintaining to avoid non-compliance status and potential legal penalties.
The experienced CPAs at Diener & Associates help contractors establish internal controls to improve their record maintenance procedures and achieve DCAA compliance. Contact our team for a consultation to learn how to match your timekeeping procedures to federal and local regulatory standards.