Labor costs usually form a substantial portion of government contract costs. As such, contractors must implement timekeeping systems to accurately track employee time per the Defense Contract Audit Agency (DCAA) regulations.
Small government contractors are the most affected as they often balance compliance with budget considerations. To cope with these challenges, they must carefully evaluate every requirement to select the best DCAA-compliant timekeeping software that fits their budget.
What Is DCAA-Compliant Software?
Government contractors need to understand that “DCAA-compliant software” isn’t a formally recognized term. It’s a marketing term software vendors use to market their products.
The software may or may not meet DCAA requirements. The DCAA does not engage in the practice of endorsing certain timekeeping software. It only provides general guidelines and enforces compliance.
Features of a DCAA-Compliant Timekeeping Software
It is important to note that an accounting system not designed to be DCAA-compliant can be adapted using certain add-on features such as real-time time tracking and detailed audit logs and audit trails. DCAA-compliant software should essentially serve the following purposes:
Accuracy in timekeeping software ensures that employees are paid for the exact work done and costs are allocated to the correct cost objectives. It is one of the gray areas that the DCAA will audit without prior notice to ensure that the government is not overcharged for labor. An effective timekeeping software should:
- Allow employees to clock in and out accurately
- Accurately capture breaks, overtime, absences, and time off
- Provide real-time tracking and reporting
- Allow for approval and verification of time worked.
Labor distribution means allocating labor costs across various projects or contracts. Labor costs can be direct or indirect, with each having a different approach to allocation.
Direct costs are those with a clear and direct relationship to a particular project or contract. In contrast, indirect costs cannot be traced directly to any specific task/contract. An example of indirect labor costs would be administrative and clerical staff working on multiple projects.
For timekeeping software to be DCAA-compliant, it should allow accurate and consistent distribution of direct and indirect labor costs.
For indirect costs, the software should be able to apply an equitable formula based on the allocation base (e.g., labor hours and direct labor costs). Besides allocation, it should provide reports detailing the distribution. It should also ensure that any adjustments made to labor distribution abide by DCAA regulations.
Distinguish Between Allowable and Unallowable Costs
In government contracting, not all expenses can be charged to the government. These are known as unallowable costs.
Some of these may be permissible in the private sector, including entertainment and charitable donations. These costs are excluded in any billing, claim, or proposal to the federal government either due to their nature or the specific circumstances under which they are incurred.
A DCAA-compliant timekeeping software should be capable of segregating allowable and unallowable costs. It should also provide alerts for potential unallowable costs and generate reports on allowable and unallowable costs for audit trails.
Cost Accounting Standards (CAS) Compliance
The CAS comprises 19 standards promulgated by the U.S. government to achieve accuracy, uniformity, and consistency in cost accounting practices. They include direct and indirect costs, guidelines on cost allocations, and cost accounting procedures. CAS compliance is mandatory for government contractors with contracts above $2 million, in accordance with FAR 15.403-4.
Timekeeping software should follow all the CAS guidelines and provide reports and audit trails for verification. It is worth mentioning that CAS compliance is not only a regulation but also a strategic move for contractors as it promotes profitability.
Contract Setup and Funding Setup
The ability to set up and manage contracts and funding is also critical in DCAA compliance. Good timekeeping software should accommodate accurate and consistent labor distribution, billing accuracy, budget management, reporting, and scalability.
These are essential for contract setup. Funding setup should also be a primary consideration in timekeeping software. The software should allow for the allocation and tracking of funds, reporting, and auditing.
Integration With Accounting Software
This is arguably one of the most essential features of timekeeping software. A DCAA audit involves evaluating the accounting system, not just the timesheets.
A seamless integration between the timekeeping software and an accounting system streamlines the audit process, aiding compliance.
Consult Accounting Experts
With so much to consider when selecting a timekeeping software, the margin for error is high. This means the contract, the contractor’s reputation, and future opportunities to work with the government are at stake. As such, it’s always advisable to consult accounting experts before deciding on timekeeping software.
The CPAs at Diener & Associates provide expert guidance in accounting and compliance for government contractors. We can help in the selection and implementation of DCAA-compliant timekeeping software to ensure smooth operations and compliance. Contact Diener & Associates for all DCAA compliance needs.