Accurate timekeeping is a foundational requirement in government contracting, and it plays a significant role in DCAA audits. Auditors assess timekeeping systems to confirm compliance with contract terms, verify labor cost accuracy, and detect potential mischarging.
From daily entry protocols to audit trail integrity, contractors must maintain consistent practices and internal controls supporting labor cost validity. A solid knowledge of what DCAA auditors evaluate during reviews helps contractors strengthen their compliance posture and prepare for audit readiness.
Daily Time Entry Standards
DCAA auditors place significant focus on how employees record time on a daily basis. Contractors are expected to implement policies requiring all labor hours to be entered daily, including uncompensated time, to support accurate labor distribution and cost allocation.
Time entries must reflect actual work performed and be certified by the employee. A supervisor must review and approve these records to confirm that time charges align with assigned duties.
The process serves as the foundation of any DCAA-compliant timekeeping system. It is imperative when employees split time across multiple contracts or projects. Errors or omissions, even unintentional, can introduce cost misallocations and increase audit risk.
Both manual and automated timekeeping systems must maintain integrity at every step. For manual systems, the use of preprinted timesheets, written entries made in ink, and correction protocols that require initialing and documentation are expected practices.
Automated systems must restrict access to authorized employees, maintain a clear audit trail for any changes, and incorporate verification steps from the employee and the supervisor. In either system, the intent is to produce an accurate, verifiable record of the hours worked on each project or cost objective.
Labor Certification Procedures
Contractors subject to DCAA oversight must implement systems capable of distinguishing between direct and indirect labor charges. This level of segregation supports proper billing, labor rate development, and project cost reporting.
Auditors expect labor distribution summaries to reconcile with payroll and general ledger records, and systems must support these reconciliations without manual intervention or adjustments outside of the approved process.
Internal controls play a central role in system design. Policies should define who is authorized to make changes, how those changes are tracked, and what level of approval is required before updates take effect. Documentation should reflect processes for setting up job codes, assigning labor categories, and managing time across multiple projects.
Procedures for remote or telecommuting staff must also be documented and aligned with overall labor tracking policies. The absence of consistent internal controls often leads to findings related to improper cost segregation or unapproved time adjustments.
Floor Check Protocols
One of the more visible aspects of DCAA timekeeping audits is the unannounced labor floor check.
Conducted as part of the Mandatory Annual Audit Requirements (MAAR 6), these checks allow auditors to verify that employees work in the proper labor categories, charge time to the correct contracts, and perform assigned duties as reported. Auditors may observe employee activity, conduct on-the-spot interviews, and compare recorded time to payroll records and labor distribution summaries.
These checks are designed to assess more than time entry compliance. They also evaluate how well employees understand timekeeping procedures, whether supervisors are actively involved in oversight, and if there are any signs of systematic mischarging.
Contractors are expected to maintain current employee lists, clear points of contact for audit coordination, and a readiness to provide documentation upon request. Inconsistencies between observed activity and time records often prompt a deeper review of timekeeping policies and system reliability.
Labor Distribution Reconciliation
Accurate labor distribution is essential for cost reporting, indirect rate development, and contract billing. Auditors examine how contractors reconcile timekeeping data with payroll records to confirm that labor charges reflect paid or accrued costs.
Each employee’s hours must be distributed exactly as recorded, without manual adjustments that bypass timekeeping systems. Any difference between time entry records and labor summaries must be supported by documentation and explained through formal reconciliation procedures.
Unpaid time must be recorded to reflect the total hours worked since this impacts labor overhead and indirect rate calculations. Contractors should have written policies that require both compensated and uncompensated hours to be tracked and reported, particularly for salaried employees whose recorded time may not directly impact payroll expenses.
Failure to include these hours can distort rate calculations and lead to questioned costs during incurred cost audits.
How to Avoid Common Compliance Issues
Auditors frequently identify repeat issues when reviewing contractor timekeeping systems. One of the most common is the improper segregation of direct and indirect labor, which often stems from poorly defined job codes or ambiguous labor categories.
Another issue is the lack of consistent procedures, especially in decentralized environments or remote work settings, where timekeeping practices may vary across teams or locations. In some cases, subcontractor or vendor labor is misbilled, either through inaccurate cost transfers or inadequate verification of labor charges.
To prepare for audits, contractors should maintain current documentation of timekeeping policies, including procedures for telecommuting, job code setup, and labor category assignment.
Electronic timekeeping systems are recommended due to their ability to generate audit trails, preserve change logs, and simplify labor tracking across projects. Preparation should also include identifying points of contact for audit coordination and making supporting documentation readily available upon request.
Electronic Timekeeping as a Compliance Asset
Modern electronic timekeeping solutions offer several advantages in supporting DCAA compliance.
Systems with mobile access allow field staff and remote employees to record time in real-time, reducing the risk of backdated entries or missing information. Features such as automated approval workflows, audit trail generation, and payroll integration further support transparency and data accuracy.
In the event of a DCAA audit, electronic systems can produce detailed reports showing time entries, changes made, approvals granted, and reconciliation records.
With these features in place, meeting compliance standards takes less time and effort. Selecting a system that aligns with DCAA expectations can improve audit outcomes and create a more efficient labor cost management process.
Supporting Compliance With Confidence
Accurate timekeeping is central to DCAA audit readiness; even small inconsistencies can raise questions during a review.
From daily time entry requirements to system-level controls and labor distribution practices, contractors are expected to maintain processes that withstand close scrutiny. A well-documented, consistently applied timekeeping system reduces audit risk and supports accurate cost recovery across government contracts.
At Diener & Associates, our team works directly with contractors to evaluate and strengthen timekeeping systems, implement effective controls, and prepare for DCAA audits with confidence. Contact us online or call 1-(703)-386-7864, and we’ll help you take the next step.