Contractors: Timekeeping Is a High Risk Area

For most government contractors, direct labor costs are usually the most significant expense charged to government contracts and usually make up the base, or largest, element used to allocate indirect costs.

Section 1001 of Title 18 of the United States Code (U.S.C.), provides that: “Whoever, in any matter within the jurisdiction of the executive, legislative, or judicial branch of the Government of the United States knowingly and willfully (1) falsifies, conceals or covers up by any trick, scheme, or device a material fact; (2) makes any materially false, fictitious or fraudulent statement or representation; or (3) makes or uses any false writing or document knowing the same to contain any materially false, fictitious or fraudulent statement or entry; shall be fined under this title or imprisoned not more than five years, or both.”

It is often appropriate to use historical expenses to estimate hours and costs for follow-on contracts or for government contracts that require goods or services similar to those provided under previous contracts. Unlike other cost items, however, labor charges are not supported by such third-party documentation as invoices, purchase orders or receipts. In addition, company personnel have complete control over the documents and the devices used to enter the original data, whether they consist of manually prepared time cards, electronic media or some other means.

The responsibility for accurate time recording is spread throughout your entire organization. In addition, electronic or manual time cards can easily be altered or controlled by individuals other than the person who actually performed the work. Consequently, from the perspective of the government, when it comes to labor, there are significant risks associated with accurate recording, distribution and payment.

If auditors from the Defense Contract Audit Agency (DCAA) note significant deficiencies in a timekeeping system, they will expand the scope of their audit. Ultimately, suspected irregular conduct may be reported to government investigative agencies, particularly if the problems have gone undetected for a long period. On the other hand, if auditors assess that the control risk of a company’s labor-accounting system is low, they are likely to reduce the frequency, scope and even number of audits.

As a government contractor, your organization is expected to maintain a labor timekeeping, accumulation and distribution system that includes appropriate internal controls such as training employees about their independent responsibilities for accurately recording time charges. This is the single most important feature managers can emphasize to demonstrate their commitment to owners, creditors and customers to guard against fraud and waste in this area.

Keep in mind that your company and its individual employees are legally responsible for ensuring compliance. The manipulation of labor costs to a contract can bring about criminal charges that can result in fines, imprisonment or both.

Tip: Create a mandatory timekeeping training plan for employees. This should include:

  • Orientation for new hires, and
  • Annual refresher courses for all employees.

Tip: Create a compliance monitoring plan that

  • Includes surprise internal floor checks to ensure that employees know and are following procedures, and
  • Generates such compliance reports as information on employees’ timekeeping habits when electronic media are used.
Kevin Brager, CPA is an Accounting and Outsourcing Manager at E. Cohen and Company, CPAs. His experience includes providing outsourced accounting and controller services to companies ranging from start-up to $25M in annual revenue; performing financial statement audits, reviews, and compilations; and preparing tax returns for individuals, corporations, and partnerships.