If you have spent any time around cost-reimbursable, time-and-materials or labor-hour contracts, you likely heard some version of this statement: timekeeping is one of the most sensitive internal controls in government contracting. That is not a scare tactic, it is an audit reality. In our experience supporting clients through Defense Contract Audit Agency (DCAA) accounting system audits and labor floor checks, timekeeping is the control most likely to fail for one simple reason: it involves nearly every employee, nearly every day.
Fortunately, timekeeping compliance is rarely achieved by buying the “perfect” tool. Contractors will find greater success when they focus on building a system and culture that produces labor charges the government can trust. Even though the Federal Acquisition Regulation (FAR) does not provide a single checklist titled “timekeeping requirements,” the government’s expectations are very clear once you connect the dots across FAR cost principles, audit clauses, Defense Federal Acquisition Regulation Supplement (DFARS) business system criteria and records retention rules.
This article provides key considerations for contractors of all sizes, from firms charging time on their first federal award to mature organizations supporting multiple task orders and contract types.
DCAA Compliance Tips for Government Contractors
For DCAA-compliant time tracking, contractors should:
- Require daily time entry and recording of all hours worked
- Maintain written timekeeping policies that reflect actual practice
- Train employees upon hire and annually, and retain training evidence
- Use clear charge code structures for direct, indirect and leave time
- Preserve audit trails for all timesheet changes
- Retain records in accordance with FAR timekeeping requirements
Avoid:
- Estimated time entries
- Permit undocumented timesheet edits
- Allowing supervisors to routinely create employee time charges
- Treating timekeeping as only a finance issue
Timekeeping Matters Even When FAR Is Light on Detail
Timekeeping is foundational to whether labor costs are allowable, allocable and adequately supported.
FAR 31.201-2 makes clear that a contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles and agency supplements. It also gives the contracting officer authority to disallow claimed costs that are inadequately supported.
Many contracts also include FAR 52.215-2, Audit and Records—Negotiation. This clause gives the government the right to examine and audit records and other evidence sufficient to properly reflect all costs claimed. It broadly defines records, including computer data, and allows the government to interview employees regarding transactions related to the contract.
For Department of Defense (DoD) contractors, DFARS 252.242-7006, Accounting System Administration, further clarifies expectations. An acceptable accounting system must include a timekeeping system that identifies employees’ labor by intermediate or final cost objectives, and a labor distribution system that charges direct and indirect labor to the appropriate cost objectives.
Finally, timekeeping records must be retained and retrievable. FAR Subpart 4.7 establishes general record retention requirements, including the expectation that records supporting costs be available for audit, typically for three years after final payment, subject to contract terms and specific record categories.
Timekeeping is a compliance requirement because it is a primary form of supporting documentation for labor costs, and the government has clear audit rights to test it.
How the Government Evaluates Timekeeping
In practice, government evaluation of timekeeping usually appears in accounting system reviews and labor floor checks.
Accounting System Reviews
During accounting system audits, the government evaluates whether the contractor’s systems and internal controls produce reliable cost data and minimize the risk of misallocations and mischarges. In DoD environments, DFARS 252.242-7006 provides a framework for these reviews, and timekeeping and labor distribution are explicitly included in the system criteria.
Labor Floor Checks and Interviews
Labor floor checks are real-time tests that the DCAA uses to evaluate compliance with timekeeping policies and procedures and the reliability of employee time records. Floor checks also verify that employees are present, performing work consistently with their job classifications and charging time to the proper cost objectives.
Floor checks are conducted to ensure that actual human behavior matches the written policies. A contractor can have well-written procedures and still receive findings if employees cannot explain how they record time or if supervisors approve timesheets without meaningful review.
Written Policies, Procedures and Training
One of the first areas auditors review is whether a contractor has current timekeeping policies and procedures, and whether employees have been trained in them.
Effective timekeeping policies should address:
- Daily time entry expectations
- Definitions of direct and indirect labor
- How charge codes are established and controlled
- Supervisor review and approval responsibilities
- Timesheet corrections and documentation requirements
- Remote, hybrid and in-office work arrangements
- Record retention and secure storage practices
Training should occur at the time of hire and at least annually thereafter. Contractors should retain evidence of training completion, such as sign-in sheets, certificates or learning management system records.
Real-world Example
A services contractor had an electronic timekeeping system and documented procedures, but no formal training program. During a labor floor check, multiple employees explained they charged time based on verbal direction from project managers. Due to the lack of training and policy reinforcement, the contractor received audit findings and encountered compliance issues, including DFARS noncompliance This incident also resulted in follow-up audits and increased government scrutiny.
Timesheet Corrections and Audit Trails
Timesheet corrections are a frequent source of audit findings. When making corrections, required procedures include:
- Documentation of the original charge and corrected charge
- A clear explanation for the change
- Employee concurrence with the correction
- Supervisor review and approval
- Preservation of an audit trail showing who made the change and when
Allowing undocumented or unilateral changes to submitted time undermines the credibility of the entire timekeeping system.
Segregation of Duties in Timekeeping
A large accounting staff is not always needed for successful segregation of duties. Instead, contractors can lead with thoughtful design to reduce the risk of manipulation or mischarging.
Good practice includes:
- Employees entering their own time
- Supervisors reviewing and approving time, without routinely initiating time charges
- Limiting the ability to edit the submitted time to authorized roles
- Separating timekeeping administration from payroll processing where feasible
Supervisors accountable for meeting contract budgets should not have the routine ability to create or alter employee time charges. Exceptions, such as prolonged employee absence, should be rare and documented. This approach aligns with DFARS accounting system expectations related to internal controls and reliable labor charging.
The Government’s Total-hours-Worked Approach
The government prefers a total-hours-worked approach, meaning all hours worked are recorded on the timesheet, not just paid hours. This matters because labor costs, indirect rates and labor distribution are affected by total hours worked. Recording only paid hours can distort effective labor rates and undermine the reliability of cost data.
Contractors should:
- Require employees to record all hours worked daily
- Clearly define how uncompensated overtime is recorded and treated, if applicable
- Apply policies consistently across the organization
Practices such as percentage-based allocations or standard “eight hours per day” entries that do not reflect actual work performed create audit risk and often draw scrutiny during floor checks.
Daily Time Entry and Charge Code Structure
A compliant timekeeping system must identify labor by cost objective. Depending on contract requirements, this may mean charging at the contract, task order, Contract Line Item Number (CLIN) or other specified level.
Best practices include:
- Daily time entry by employees
- Separate charge codes for direct labor, indirect labor and leave categories
- Limiting charge code access to those relevant to an employee’s role
- Finance or accounting oversight of charge code creation and maintenance
Using overly broad or poorly defined indirect codes can create confusion and undermine labor distribution reliability.
Real-world Example
A contractor used a single indirect code for administrative work, internal IT support and proposal preparation. Employees could not consistently explain what belonged in that code versus what should be charged directly. The issue was resolved by refining indirect charge codes and providing targeted training.
Employee Certification and Supervisor Approval
Timesheet certification is a key internal control. Employees certify that the time recorded is accurate and complete. Supervisors confirm that charges are reasonable and consistent with work performed.
Approvals should be meaningful. Automatic or rubber stamp approvals are frequently identified during audits and floor checks.
Remote and Hybrid Work Considerations
Remote and hybrid work are now standard operating models for many contractors. Timekeeping policies should reflect this reality.
Policies should address eligibility, expectations for daily time entry, supervisor oversight and any distinctions the contractor makes between travel and commuting. Auditors will compare these policies to actual practice during interviews and floor checks.
Electronic vs. Paper Timekeeping Systems
While the government does not mandate a specific timekeeping tool, it does require reliable, secure and auditable records. Paper or manual systems can be acceptable in smaller environments if controls — including secure storage, ink entries, documented corrections, employee certification and supervisor approval — are strong.
Electronic systems often scale better as organizations grow. When configured properly, they support role-based access, approval workflows and audit trails, and are more cleanly integrated with payroll and job cost systems. FAR recognizes electronic records as acceptable when integrity and accessibility are maintained.
Timekeeping compliance is about demonstrating reliability. FAR places responsibility on the contractor to maintain adequate records and supporting documentation for labor costs, which allows the government to disallow costs that are not adequately supported. Audit clauses give the government broad rights to examine records and test how systems operate in practice. DFARS further defines expectations for contractors subject to business system requirements. Records must also be retained and retrievable for audit.
If you are preparing to bid cost-type work, scaling your contract portfolio, or trying to reduce the risk of a labor floor check finding, the best time to address timekeeping is before an audit forces the issue.
Your Guide Forward
Whether you are updating policies, implementing or reconfiguring an electronic timekeeping system, training your workforce, or preparing for a DCAA audit or floor check, experienced guidance can help you focus on what matters most and avoid costly missteps. Collaborate with Cherry Bekaert’s Government Contracting advisors to navigate complex compliance requirements and maximize the value of your awards. With a proven track record in government contracts and grants, our professionals provide the guidance you need to avoid costly surprises and stay audit ready.
