DCAA Timekeeping Requirements: Labor Charging, Floor Checks, and What Auditors Look For

Labor is typically the single largest direct cost on a government services contract, which makes timekeeping the accounting control DCAA scrutinizes hardest. The requirement is simple to state: employees record their own time, daily, to the correct charge number, and a supervisor with knowledge of the work approves it. The requirement is hard to run cleanly in practice, and labor mischarging, whether an honest same-day error or a pattern that looks deliberate, is one of the most common findings in DCAA audits and one of the few that can escalate into a False Claims Act referral rather than a routine questioned cost.

What does DCAA actually require in a timekeeping system?

The regulatory language is short, but DCAA’s Standard Practice Manual and decades of audit findings have turned it into a fairly specific set of operational requirements. The system, whether it is a paper timesheet, a spreadsheet, or dedicated software, has to satisfy all of the following.

• Daily entry by the person who did the work. A project lead or admin entering time on behalf of the whole team is a finding waiting to happen, because it removes the contemporaneous record that makes the timesheet credible evidence of what actually happened.
• The correct charge number at the time the work is performed. If an employee moves from Contract A to a proposal effort at 1 PM, the charge number changes at 1 PM, not at the end of the week when someone reconstructs the day from memory.
• Total time accounting. Every hour worked gets recorded, whether it is paid or unpaid, straight time or overtime, and whether it is charged to a contract or to an indirect account. If an exempt employee works 45 hours in a week but only 40 are recorded, the missing 5 hours understate the denominator used to compute indirect rates, which overstates every rate built on that base.
• An audit trail for electronic systems. Time-stamped entries, a log of who entered what and when, and no ability to silently backdate an entry without it showing up as a correction.

How does supervisor approval work?

A timesheet an employee fills out and nobody reviews is not a control. DCAA requires that a supervisor with actual knowledge of the employee’s work, not simply whoever is next in the org chart, reviews and approves the entry before it flows into payroll and cost accumulation.

• Approval has to happen close to the time the work was performed, typically within the same pay period. An auditor comparing approval timestamps to submission dates is checking for exactly this: approvals that trail weeks behind are functionally no approval at all.
• The supervisor’s review is supposed to catch charge-number errors before they become part of a government billing, not simply rubber-stamp whatever the employee entered. DCAA interviews supervisors during audits and asks how they decide what to approve; “I just click approve” is a finding.
• For remote and distributed teams, the review still has to happen, and the system has to log that it happened. A supervisor who cannot see the work being done in real time needs some other basis (status updates, deliverable check-ins, project management tool activity) for confirming the charge is accurate.

What correction procedure does DCAA expect?

Timekeeping mistakes happen, an employee forgets to switch charge numbers, or enters the wrong contract number by typo. DCAA does not expect a perfect system. It expects a documented, auditable correction process.

• The original entry must be preserved, not deleted or overwritten. A paper system uses a single line-through with the correction initialed; an electronic system logs the original value, the new value, and who made the change.
• The reason for the correction has to be recorded, and both the employee and the supervisor re-approve the corrected entry.
• Undocumented corrections, or a pattern of frequent corrections concentrated in a few employees or a few contracts, are a red flag. DCAA reads a high correction rate as a sign that the original entries were not reliable in the first place, which undermines confidence in the whole timekeeping system, not just the corrected entries.
• Batch corrections, entering or changing many employees’ time at once from a spreadsheet reconciliation, are especially risky. They tend to happen after the fact, they rarely preserve individual audit trails, and they are exactly the pattern DCAA associates with labor mischarging cover-ups rather than honest error correction.

How does a floor check work?

A floor check is DCAA’s direct test of whether recorded time matches reality. The auditor does not call ahead.

• An auditor arrives on-site during normal business hours, identifies employees present, and asks a sample of them what they are currently working on.
• The auditor compares each answer to the charge number on that employee’s timesheet for that day. A mismatch, the employee says they are working on a proposal but the timesheet shows eight hours on Contract X, is a labor mischarging finding.
• For remote workforces, DCAA conducts virtual floor checks: reviewing communication logs, project management tool activity, or interviewing employees by phone or video at an unannounced time, then comparing the answers to the timesheet.
• A single, isolated mismatch typically produces a questioned cost and a recommendation for improved controls. A pattern across multiple employees, or evidence that employees were instructed to charge time to a contract they were not actually working on, escalates toward a fraud referral. The mechanics of the audit process that follows a floor check finding are covered in the guide on the DCAA audit process.

How do I classify labor as direct vs indirect?

Every hour an employee works has to land in one of two buckets, and the classification has to be consistent across contracts and across time.

• Direct labor is work that can be identified and assigned to a specific contract or task order without an allocation step. If the work benefits one contract, it is direct to that contract.
• Indirect labor is work that benefits multiple contracts or the business generally: administrative time, internal training, facility maintenance performed by staff, or bid-and-proposal (B&P) and independent research and development (IR&D) work.
• The classification has to be consistent. Charging the same type of activity as direct labor on one contract and indirect on another, without a documented reason for the difference, is precisely the inconsistency CAS 402 targets, and DCAA will flag it even for contractors who are not fully CAS-covered.
• Proposal work is a common gray area. An employee pulled off contract work to help write a proposal for a new award needs to switch their charge number to the B&P pool for that time, even if it is the same afternoon and the same desk. The Ridgeline hypothetical above is exactly this scenario going wrong at scale.

What are the most common timekeeping deficiencies?

The same handful of problems show up across contractors of every size, and DCAA’s own published guidance on frequent findings reflects it.

• After-the-fact recording. Employees fill in a week’s worth of time at the end of the week or the pay period, reconstructing from memory rather than recording contemporaneously. This is the single most common finding and the hardest one to defend, because it means every entry is a reconstruction, not a record.
• Missing or backdated supervisor approvals. Approvals entered weeks after submission, or bulk-approved by a manager who never reviewed the individual entries.
• Undocumented corrections, discussed above, and particularly bulk corrections made outside the timekeeping system itself.
• Charge number not updated mid-day when an employee moves between a contract and an indirect activity, or between two contracts.
• Timesheets that do not reconcile to payroll. If the hours on the timesheet do not match the hours payroll actually paid, DCAA has no basis for trusting either number.

What should I do next?

A compliant timekeeping system is not expensive to run (dedicated timekeeping software typically costs $5 to $15 per employee per month), but it has to be in place and operating, with a real history of daily entries and documented approvals, before a floor check or an incurred cost audit arrives. Retrofitting the process after the fact, or after DCAA has already found the gap, is far more expensive than building it correctly from the start.

• DCAA compliant accounting system requirements, where timekeeping fits into the full DFARS 252.242-7006 adequacy picture
• DCAA audit process, how floor check findings flow into the broader audit and reporting process
• DCAA indirect rate structure, why total time accounting directly affects every indirect rate a contractor bills
• Setting up as a small government contractor, the sequence for getting a compliant timekeeping system running before the first cost-type award

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.