When a company is to be awarded a cost reimbursable or cost-plus contract, the accounting system will have to be approved by DCAA. The approval process is to ensure that the company can accurately charge labor, materials and other costs to specific contracts. The most troublesome cost to be tracked is labor as it is not always clear what a person is doing and for how long.
Each employee working on a Federal contract will need to maintain an accurate and up-to-date timesheet. A system (manual or computerized) and procedures have to be developed, written and employees trained to follow. Employees need to enter their time worked either on the day or the day after incurred. All hours including administrative time needs to be recorded. This is because the employee’s total pay will be divided by their total hours to get an hourly rate. For example, if an employee works 9 hours per day their salary will be spread over all 45 hours worked during a week. At the end of each timesheet period, the employee will need to review and sign the timesheet as being accurate. Then the employee’s supervisor needs to sign the timesheet as accurate. It is important that only the employee can change their own timesheet to prevent others from making unapproved changes.
Time Charge Code
Time charge codes are what code an employee uses to designate the time entered as being for a specific contract. Many companies use codes in place of the contract number to reduce complexity to the employees. The time charge codes must map to a specific contract and possibly to a task within the contract. Cost reimbursable contracts can include cost reporting by task so make sure you track time the same way to allow for this reporting.
Paper or Automated
Most companies are using automated timekeeping systems these days. However, DCAA auditors still like to see a physical, printed timesheet with original signatures to verify the timesheets are approved. Sophisticated timekeeping systems can include the means to electronically sign the timesheet but be sure you can prove to the auditors that only the employee can approve their own timesheet.
Cost For a Contract
To figure the cost of labor against a contract for one time period, divide the employee's gross payroll by the total number of hours worked during that period to obtain an hourly rate. Then multiply the hourly rate times the number of hours charged to the one contract being computed. Total all employees’ time charges for the contract to obtain a total direct labor cost for the contract. Continue for each contract with charges during the time period. Remember to compute indirect time such as administrative, marketing, vacation and training as if these were contracts. The total for all contracts should match the total gross payroll for the time period.
Procedures In Writing
During your audit, the auditors will ask to see your written procedures for timekeeping and charging to contracts. Be sure all the procedures are written down and being followed. The procedures include how you compute cost charged to a contract, how timesheets are reviewed and who approves timesheets and what happens if an error is found. All automated systems should include an audit log to track who made what change so problems can be researched later.
DCAA will periodically conduct a timesheet audit, sometimes with no advance notice. The auditor will select a random sample of employees and then ask them a few questions about their timesheet and the process. Questions include:
- Can you show me your current timesheet (auditor is seeing if it is up-to-date)?
- How do you know what charge code to enter?
- Who approves your timesheet?
- Are you ever asked to charge against a different contract from which you are working on (auditor is looking for fraud)?
- Show me how you access and update your timesheet.
Hints For Success
Be sure the total charged to all contracts and indirect costs total gross payroll for the time period. An error here can cost you money if not charged to a contract when valid or result in refunds.
Periodically conduct your own timesheet audit to ensure employees are keeping their timesheets current.
At year-end be sure the total timesheet charges for the year equal the IRS Form 941 totals as this will be part of the annual incurred cost submission.
Make sure all time charge codes are current and reflect active contracts. Stale time charge codes can result in lost billing. Charging to a contract after it has ended will mean lost revenue.
New employees should be trained in the timesheet procedures as part of their orientation so they start correctly.
Have your procedures reviewed by someone outside of your company who is familiar with Federal contracts to be sure you have included everything needed.