By: Curt Smith, Manager
Suppose you have spent your career managing programs funded by cooperative agreements but just recently moved to program management for a defense contractor. Would you wonder about the differences in culture, policies, or regulation between the two environments? Probably, especially given that you just jumped from the world of Federal assistance to acquisition.
Suppose after working as a nurse for a contractor providing services to Department of Defense (“DoD”) personnel, you finally got your dream job providing medical care to sick children overseas on a USAID grant. You might have similar concerns.
In both cases, one of the areas of immediate concern might be documentation requirements concerning how you charge your time. In this article, we will compare Federal assistance and acquisition regulations concerning time charging to determine the differences and similarities.
To answer this question, we must look at cost principles. Cost principles for Federal assistance are found in 2 CFR 200.400 (Title 2 Grants and Agreements, Chapter 2 Office of Management and Budget (“OMB”) Guidance, Part 200 Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards, Subpart E – Cost Principles). Cost principles for Federal acquisition are found in 48 CFR 31.2 or just FAR 31.2 (Title 48 Federal Acquisition Regulations System, Chapter 1 Federal Acquisition Regulation, Part 31 Contract Cost Principles and Procedures, Subpart 2 Contracts with Commercial Organizations).
Let’s look first at Federal assistance. Part 200 Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards, known as the Uniform Guidance, was issued in December 2014, and was developed from various OMB circulars including A-87, Cost Principles for State, Local, and Indian Tribal Governments; A-122, Cost Principles for Non-Profit Organizations; and A-133 Audits of Institutions of Higher Education and Other Non-Profit Organizations. The OMB revised the standards for timekeeping in the Uniform Guidance.
Previous OMB guidance required documented, approved payroll records in support of compensation for personal services. Specifically, OMB Circular A-122 required the following:
- The distribution of salaries and wages to awards must be supported by personnel activity reports (time sheets).
- Time sheets must be maintained by all personnel whose compensation in whole, or in part, is charged to government awards.
- Time sheets must reflect an after-the-fact determination of actual activity (not budgeted) of each employee.
- Each time sheet must account for employees’ total time.
- Time sheets must indicate a total number of hours worked each day.
- Time sheets must be signed by an employee and approved by a supervisor.
- Time sheets must be prepared at least monthly.
Part of the reason the OMB revised the regulations was that numerous grantees from a wide variety of sectors had audit findings about personal services documentation, so much so that findings in the area were considered common. Timekeeping was an identified risk area in OMB Circular A-133. A-133 Section 525(d)(1) reads, “Federal programs primarily involving staff payroll costs may have a high-risk for time and effort reporting…” In response to the numerous audit findings, the OMB changed its regulatory approach. Rather than emphasize the maintenance and certification of timesheets, the Uniform Guidance emphasizes controls and the overall timekeeping environment. Section 200.430 Compensation – Personal Services, (i) Standards for Documentation of Personal Expenses, requires that records that accurately reflect the work performed must:
- Be supported by a system of internal control which provides reasonable assurance that time charges are accurate, allowable, and properly allocated;
- Be incorporated into the official records of the entity;
- Reflect the total activity for the which the employee is compensated;
- Encompass federally assisted and all other activities compensated by the entity;
- Comply with the established accounting policies and practices of the entity; and
- Support the distribution of the employee’s salary or wages among specific activities or cost objectives if the employee works on more than one Federal award; a Federal award and non-Federal award; an indirect cost activity and a direct cost activity; two or more indirect activities which are allocated using different allocation bases; or an unallowable activity and a direct or indirect cost activity.
The Uniform Guidance also allows, with certain limitations, the use of budget estimates on an interim basis, the distribution of time expressed as a percentage amongst categories of activities, and the use of substitute systems such as statistical sampling to allocate salaries and wages to Federal awards for states, local governments and Indian tribes.
Now let’s look at Federal Acquisition Regulation (“FAR”). The approach in FAR is different from the Uniform Guidance. First, there is no specific regulation concerning timekeeping in FAR itself. The regulation is instead general. FAR 31.201 -2(d) reads:
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 in this subpart and agency supplements.
Some believe this general approach is better. The regulation simply states the documentation requirements provide flexibility in compliance. However, the lack of specific guidance often leaves contractors wondering what timekeeping systems, practices, and policies would result in compliance, and contractors often look to other sources for guidance such as agency FAR supplements and the Defense Contract Audit Agency (“DCAA”).
The agency FAR supplements contain minimal guidance on the issue. For example, the Department of Defense FAR supplement (“DFARS”) in 252.242-7006(c)(9) requires that the contractor’s accounting system provide “a timekeeping system that identifies employees’ labor by intermediate or final cost objectives.”
DCAA, however, provides some guidance concerning timekeeping. In DCAA Manual 7641.90, Information for Contractors under Labor Charging System (Note 4 page 15), DCAA describes effective timekeeping procedures and controls, lists detailed instructions for timesheet preparation, and includes recommended timekeeping policy. In terms of timekeeping controls, DCAA emphasizes the role of the individual employee and the critical role management plays in helping employees understand their responsibility to enter their time charges accurately. In addition, DCAA recommends the following.
- Segregation of responsibilities for labor-related activities (e.g., separating the responsibility for timekeeping and payroll accounting should be separated). Supervisors who are accountable for meeting contract budgets should not have the opportunity to initiate employee time charges.
- Procedures must be evident, clear-cut, and reasonable.
- Maintenance of controls must continually be verified and violations must be remedied through prompt and effective action.
- Individual employees must constantly be made aware of controls that act as an effective deterrent against violations.
Regarding time sheet preparation, DCAA states that detailed instructions for timesheet preparation should be established through a timekeeping manual and/or company procedure. The instructions should indicate that the employee is personally responsible for:
- Recording his/her time on a daily basis.
- Recording time on the time sheet.
- The correct distribution of time by project numbers, contract number or name, or other identifiers for a particular assignment. To ensure accuracy, a listing of project numbers and their descriptions should be provided to the employee.
- Changes to the timesheet. Procedures should be in place that identify the original time charge, the corrected time charge, and documentation from the employee indicating his/her concurrence with the change.
- Recording all hours worked whether they are paid or not. This is necessary because labor costs and associated overheads are affected by total hours worked, not just paid hours worked. Therefore, labor rate computations and labor overhead costs should reflect all hours worked. Unpaid hours worked are termed “uncompensated overtime.”
- Certifying that the hours on the time sheet reflect the hours worked and the appropriate cost objective at the end of each work period.
Regarding timekeeping policy DCAA recommends the following:
- The supervisor should approve and cosign, all timesheets.
- The supervisor is prohibited from completing an employee’s timesheet unless the employee is absent for a prolonged period on some form of authorized leave.
- The guidance should state that the nature of the work determines the proper distribution of time, not availability of funding, type of contract, or other factors.
- The company policy should state that the accurate and complete preparation of timesheet the employee’s responsibility. Careless or improper preparation may lead to disciplinary actions under company policies, as well as applicable Federal statutes.
In the DCAA Contract Audit Manual (“CAM”), DCAA describes effective labor system internal controls (Section 5-902), procedures associated with accurate and compliant timekeeping systems (Section 5-909), and procedures for evaluating timekeeping controls (Section 6-405.2). Both DCAA Manual 7641.90 and the CAM are available on DCAA website. The DCAA also provides its audit programs of labor system controls, labor incurred costs, and labor floor checks on its website.
So in short, while FAR does not itself provide detailed regulation concerning time charging, it is evident that Federal agencies, DoD in particular, require contractors to implement sufficient internal controls and policies to ensure accurate timekeeping.
As for comparing guidance regarding labor charging under Federal assistance and Federal acquisition rules, what are the similarities and differences? Both emphasize the role of effective internal controls and well-written policies in the production of compliant systems. The main difference is the flexibility provided under the Uniform Guidance to use budgets on an interim basis, percentages to distribute time amongst activities, and the use of substitute systems (e.g., statistical sampling to allocate salaries and wages to Federal awards). None of this is available in FAR, agency FAR supplements, or DCAA guidance. In their essential elements, however, both areas of regulation agree.
In summary, the following statement encapsulates the guidance for both Federal assistance and acquisition:
Employees complete your time sheet accurately daily.