For government contractors, timekeeping and accounting systems sit at the center of audit scrutiny. DCAA reviews often focus less on individual tools and more on how labor hours move from initial entry to cost records, billings, and the general ledger. Breakdowns in that flow can turn routine system choices into compliance findings with financial consequences.
Understanding how integration works under DFARS and DCAA standards allows organizations to assess their accounting systems and outsourced services with greater confidence and insight.
| In This Article: Today’s discussion outlines why timekeeping and accounting integration is treated as a compliance requirement, how auditors assess the flow of labor through financial records, and where integration gaps most often create audit and contract administration risk. |
Why Integration is Treated as a Compliance Requirement Rather Than an Efficiency Choice
For government contractors, it’s essential to integrate timekeeping and accounting because DFARS accounting system requirements see these two functions as parts of the same control system.
An acceptable accounting system under DFARS 252.242-7006 includes both a timekeeping system and a labor distribution system, along with general ledger control, reconciliations, and documented adjustments.
Auditors evaluate the combined process, not isolated applications, to determine whether the system provides reasonable assurance that costs are properly accumulated, allocated, and reported.
Contract clauses addressing the contractor’s business systems heighten the consequences of integration failures. When DFARS 252.242-7005 applies, material weaknesses in covered systems may result in payment withholds following a final determination.
Integration gaps often emerge at the handoff points between time capture, labor distribution, job cost records, the general ledger, and billing, which places system design decisions squarely in the compliance arena.
How DFARS and DCAA Define Integration in Practical Terms
Integration under DFARS and DCAA guidance focuses on outcomes rather than software architecture.
The combined process must demonstrate the ability to identify and accumulate direct costs by contract, apply indirect costs consistently, maintain costs under general ledger control, and produce contract cost results at least monthly through routine postings. Supporting documentation, management review, and reconciliation routines form part of that expectation.
DCAA guidance reinforces this perspective by describing timekeeping and labor distribution as interconnected. Auditors look for a traceable flow of labor hours into labor dollars, through cost objectives, and into the accounting records.
Attention centers on whether job cost ledgers and subsidiary records reconcile to the general ledger and whether adjustments are properly documented and approved.
Cost Objectives and Consistency as the Foundation of Auditability
When cost objectives are established upfront, they provide the guidance needed to keep integration processes both efficient and compliant.
Under Cost Accounting Standards, contracts, tasks, or other work units serve as accumulation points for measuring costs. DFARS requirements call for timekeeping systems to identify labor by intermediate or final cost objectives and for labor distribution systems to charge labor accordingly.
Many audit results are based on the consistency requirements of CAS 9904.402. When expenses are incurred for the same purpose under comparable conditions, they must be consistently classified as either direct or indirect costs in relation to the final cost objectives.
Misalignment between timekeeping labor codes and accounting cost structures can lead to inconsistent treatment, duplicate allocations, or labor sitting in inappropriate pools, all of which complicate audit support and corrective actions.
What Auditors Examine Inside Integrated Timekeeping Systems
Electronic and outsourced timekeeping environments shift audit attention toward control design and system governance.
Auditors typically review how labor codes are created and maintained, including alignment with contracts, indirect activities, and other cost objectives. Access controls over code tables and edit capabilities factor heavily into audit conclusions.
Corrections to timesheets receive close scrutiny. A compliant environment maintains a clear audit trail that shows who made a change, when it occurred, and why it was required, along with evidence of supervisory awareness.
Cutoff controls also matter, as labor must be posted to the correct accounting period to support monthly contract cost reporting and billing accuracy. Auditors expect modern systems to be traceable, and logging and monitoring practices, often based on NIST guidance, help achieve this.
Labor Distribution As The Point Where Integration Often Breaks Down
Labor distribution represents the conversion step where time data, payroll information, and allocation logic converge.
DFARS requires labor to be charged to the appropriate cost objectives, while DCAA guidance emphasizes reconciling job cost records to the general ledger. Integration risk increases at this stage because multiple data sources must align precisely.
Hours from timekeeping, pay rates, overtime treatments, and mapping rules for direct and indirect labor all feed into labor distribution postings.
Compliance depends on the ability to trace a labor entry from its original time record through payroll calculations and into both job cost and general ledger accounts. Clean reconciliations and supported adjusting entries provide the evidence base that auditors expect during system reviews.
Preserving Visibility Over Indirect Costs Unallowables and Billings
Integrated systems must preserve visibility into indirect costs and unallowable items rather than obscuring them.
FAR Part 31 establishes allowability standards, while CAS 9904.405 requires expressly unallowable costs to be identified and excluded from billings, claims, and proposals. Chart of accounts design, project structures, and labor codes play a central role in meeting these obligations.
Requirements for billing and cost monitoring put even more stress on the overall quality of integration. DFARS calls for interim cost determinations at least monthly and requires billings to reconcile with cost accounts on both a current and cumulative basis.
Late postings or unreconciled data flows increase audit exposure and raise operational concerns under the limitation-of-cost and limitation-of-funds clauses.
Record retention and audit access requirements under FAR Subpart 4.7 and FAR 52.215-2 extend these considerations over multiple years, particularly when accounting services are outsourced, and system custody resides with third parties.
Bringing Compliance Clarity to Integrated Systems and Ongoing Oversight
Timekeeping and accounting integration sit at the intersection of audit readiness, contract administration, and cash flow management. Sound system design supports traceability, consistent cost treatment, reliable reconciliations, and defensible billings across the full life of a government contract.
A disciplined approach to integration reduces exposure during DCAA reviews and strengthens confidence in the numbers used for management and contracting decisions. Understanding the stakes of compliance, Diener & Associates works with government contractors as a trusted advisor, bringing decades of experience, responsive service, and practical insight into DFARS and DCAA expectations.
Organizations considering outsourced DCAA-compliant accounting services or reviewing their current setups can schedule an online consultation or call our team at (703) 386-7864 to discuss how combined systems and careful management can help them stay compliant and grow their business.