Government Contractor Timekeeping: DCAA Requirements and Labor Charging

Labor is typically 50% to 70% of a services contractor’s total costs on a government contract. That concentration makes timekeeping the single highest-stakes compliance area for most contractors, and DCAA treats it accordingly. Timekeeping is audited more frequently than any other element of a contractor’s accounting system, because labor mischarging is the most common basis for False Claims Act cases, and because even unintentional errors cascade through the entire cost accumulation structure (indirect rates, contract billings, incurred cost submissions, and forward-pricing rate proposals all start from the labor distribution).

The requirements are conceptually simple: daily time recording, supervisor approval, documented corrections, total time accounting. DCAA verifies compliance through floor checks, transaction testing, and system audits. The consequences of failure range from questioned costs on the mild end to treble damages under the False Claims Act on the severe end. If you are setting up a DCAA compliant accounting system for the first time, timekeeping should be the first subsystem you build, because it is the first thing DCAA will test and the hardest to retrofit.

Why does DCAA focus on timekeeping more than anything else?

DCAA’s emphasis on timekeeping is a direct function of dollars at risk. On a professional services contract (IT, engineering, consulting, research), labor is the dominant cost element. When labor costs are wrong, everything downstream is wrong: the direct-versus-indirect cost split is wrong, the indirect rates are wrong, the contract billings are wrong, and the incurred cost submission is wrong. A single mischarging pattern, if it persists for a full fiscal year across multiple contracts, can produce hundreds of thousands of dollars in questioned costs.

The enforcement exposure compounds the financial risk. The False Claims Act (31 USC 3729) imposes liability on anyone who knowingly submits a false claim to the government. A timesheet that charges 8 hours to Contract A when the employee actually worked on Contract B is a false record. If that false record feeds into an invoice submitted to the government, the invoice is a false claim. “Knowingly” under the statute includes actual knowledge, deliberate ignorance, and reckless disregard, so a contractor that knows its timekeeping system is unreliable and continues billing on the basis of those timesheets is exposed even without proof of intentional fraud.

The Department of Justice has made labor mischarging a priority in its qui tam (whistleblower) enforcement. Many of the largest False Claims Act settlements involve labor charging violations: employees directed to charge overhead time to contracts, employees charging contracts they did not work on, or supervisors rubber-stamping timesheets. These cases produce eight- and nine-figure settlements, and the investigation almost always starts with timesheets.

What are the daily time recording requirements?

The core rule is that employees must record their time each day, at or near the time the work is performed. “Daily” means the employee enters hours for today before the end of today (or the next morning at the latest, depending on the contractor’s policy). It does not mean filling in the entire week on Friday afternoon from memory. It does not mean reconstructing two weeks of time when the pay period closes. The daily recording requirement exists because same-day entries are the most accurate, and accuracy degrades rapidly as the interval between the work and the recording increases.

Each day’s entry must show the hours charged to each charge number. If an employee works 3 hours on Contract A Task 1, 2 hours on Contract A Task 2, 2 hours on Contract B, and 1 hour on overhead (internal meetings, administrative work), the timesheet for that day must show all four entries with the corresponding charge numbers and hours. The level of detail depends on the contractor’s charge number structure, but the minimum is one entry per contract or indirect account per day.

The employee must sign (physically or electronically) the completed timesheet to certify that the hours recorded are accurate and reflect work actually performed. This certification establishes individual accountability. If a floor check later reveals that the recorded time does not match actual work, the signed certification is evidence that the employee either knew the entry was false or did not take the certification seriously.

Some contractors allow a brief grace period (for example, time recorded by 10 a.m. the following business day is considered timely). The grace period must be short, documented in the timekeeping policy, and consistently enforced. A “daily” entry that is actually submitted three days later is not daily, and DCAA will flag it.

What is total time accounting?

Total time accounting means that every hour an employee works (or is paid for) must be recorded and charged to something. The contractor cannot record only the hours charged to government contracts and ignore the rest. All hours must be accounted for, whether they are charged to a direct contract, an indirect account (overhead, G&A, B&P, IR&D), or a leave category (PTO, holiday, sick time, jury duty). The purpose is to ensure that the full cost of each employee is visible and properly distributed.

The total time accounting requirement prevents a practice DCAA considers one of the most serious timekeeping violations: absorbing unbilled time. If an employee works 45 hours but only records 40, the 5 unreported hours distort the cost picture. If those hours were spent on overhead, they belong in the overhead pool. If they were spent on a contract, they belong in that contract’s cost accumulation. Ignoring them either understates indirect rates or understates contract costs.

The categories that must be recorded include direct contract hours (by contract and task), indirect hours (overhead, B&P, IR&D, training, general administrative work), and leave (PTO, holiday, sick, jury duty, bereavement, military). The charge number structure must provide a valid destination for every type of activity an employee might perform. If the structure has gaps, employees will either leave time unrecorded (violating total time accounting) or charge it to the wrong account (labor mischarging), and both are findings.

How does supervisor approval work?

Every timesheet must be reviewed and approved by someone with firsthand knowledge of the work the employee performed. The supervisor’s approval is not a formality. It is a management control that DCAA evaluates both for existence (is there an approval on file?) and for substance (does the approver actually know whether the charges are accurate?).

The approver must be in a position to know what the employee worked on during the period. For direct-charge employees, this is typically the project manager or task lead who assigns work and monitors daily progress. For employees splitting time across multiple contracts, the approver should be someone who oversees the employee’s work across all of those contracts, or each project manager should approve the hours charged to their contract. The worst practice is routing all timesheets to a single administrative person (an office manager or payroll clerk) who has no knowledge of contract work and rubber-stamps everything. DCAA considers that arrangement equivalent to no approval at all.

The timing of approval matters. Timesheets should be approved before they feed into payroll and cost accumulation. Approvals that happen weeks after the fact, or that are batch-processed at the end of the month, are weaker controls that DCAA will question. DCAA tests the approval process by pulling a sample of timesheets and checking for supervisor signatures (or electronic approvals). The auditor may also interview supervisors to verify that they understand what they are approving. A supervisor who says “I just approve whatever they submit” is confirming that the control is not functioning, and the auditor will note that as a deficiency.

How must corrections and labor transfers be handled?

Timesheets are source documents, and like all source documents in an auditable system, the original entry must be preserved. A correction is not a deletion and re-entry. It is a documented change that shows the original entry, the corrected entry, the reason for the correction, the date of the correction, the employee’s acknowledgment, and the supervisor’s approval.

A labor transfer (moving hours from one charge number to another) is a specific type of correction. This happens legitimately when an employee selects the wrong contract by mistake or when a charge number is created after the work was performed. The transfer must be documented with the same rigor as any other correction: original charge, new charge, reason, employee and supervisor approval, and a complete audit trail.

What DCAA watches for is patterns. A single correction in a pay period is normal. Ten corrections in a pay period by the same employee are a flag. A systematic pattern of transferring hours away from an overhead account to a direct contract at the end of each month (making the contract look more productive or avoiding overhead rate increases) is a serious finding that can trigger a referral to the Office of Inspector General. Similarly, transfers that consistently move hours from a contract approaching its funding ceiling to a contract with available funding suggest budget management through timesheet manipulation rather than legitimate corrections.

The timekeeping system must maintain a complete audit trail for every correction and transfer. The auditor needs to see the before-and-after states of the timesheet, the timestamp of the correction, the identity of the person who made it, the identity of the person who approved it, and the stated reason. Systems that allow corrections to overwrite the original entry without preserving history will not pass audit.

What happens during a DCAA floor check?

A floor check is an unannounced site visit by a DCAA auditor to verify that employees are working on the contracts they are charging. The auditor arrives without prior notice, walks through the facility, notes what each person appears to be working on, and asks a sample of employees what contract or task they are currently charging. The auditor then pulls the timesheets for those employees for that day and checks whether the entries match the observed activity. If an employee says “I’m working on the Smith Air Force Base network upgrade” but the timesheet shows a different contract charged for that day, the auditor has a finding.

Floor checks can be conducted at any time. DCAA does not schedule them, and the contractor has no right to advance notice. The unpredictability is intentional; it prevents contractors from coaching employees before a visit. For contractors with remote or hybrid workforces, DCAA has adapted the concept: the auditor may request virtual meetings with employees, ask about current work, and compare responses to timesheet entries. The auditor may also request electronic evidence of work performed (commit logs, email timestamps, document edit histories, collaboration platform activity) to corroborate charges.

How does uncompensated overtime affect labor charging?

Uncompensated overtime is time that salaried, exempt employees work beyond 40 hours per week without additional pay. The employee receives the same salary whether they work 40 hours or 55 hours, but the total time accounting requirement means all hours must be recorded.

The accounting effect is significant on cost-type contracts. If an engineer earns $120,000 per year and the contractor’s standard work year is 2,080 hours, the nominal hourly rate is approximately $57.69. If that engineer works 45 hours in a given week but records only 40, the effective rate stays at $57.69. If the engineer records all 45 hours, the effective rate drops to approximately $51.28 ($2,307.69 weekly salary divided by 45 hours). On a cost-type contract, where the government pays actual labor costs, the lower effective rate means lower government cost per hour of direct labor. A contractor that does not record uncompensated overtime is effectively billing at a higher hourly rate than the employee’s actual cost.

FAR 31.205-6(p) requires the contractor’s compensation system to account for this effect. The timekeeping system must capture total hours worked, and the cost accounting system must compute effective labor rates that reflect those totals. On fixed-price contracts, uncompensated overtime affects the contractor’s profitability but not the government’s payment. However, because the same timekeeping system feeds all contract records and indirect rates are computed across all contracts, the total-time requirement applies regardless of contract type.

What are the penalties for labor mischarging?

The penalty structure for labor mischarging operates on a spectrum from administrative remedies through civil liability to criminal prosecution, depending on the severity, the intent, and the pattern.

At the administrative level, DCAA can question the costs associated with mischarging. Questioned costs are excluded from the contract billing, and if they have already been paid, the contractor must refund them. For a sustained mischarging pattern, DCAA can recommend that the contracting officer determine the timekeeping system inadequate under DFARS 252.242-7006, which triggers the 10% payment withhold and the corrective action plan requirement described in the DCAA compliant accounting system guide.

At the civil level, the False Claims Act (31 USC 3729) is the primary enforcement tool. A contractor that “knowingly” submits a false claim (including a claim based on false time records) is liable for three times the government’s actual damages plus a civil penalty of $13,508 to $27,018 per false claim (adjusted periodically for inflation). Each invoice containing a false charge is a separate false claim. A contractor billing monthly on five contracts, with mischarges on each, faces five per-claim penalties per month, each carrying its own penalty on top of treble damages. Whistleblower (qui tam) actions entitle the relator (often a current or former employee) to 15% to 30% of the recovery, creating a powerful incentive for employees to report mischarging.

At the criminal level, 18 USC 1001 makes it a felony to knowingly and willfully make a false statement in any matter within the jurisdiction of the federal government. Criminal prosecution typically requires proof of intentional fraud, but the bar is lower than many contractors assume. A supervisor who directs employees to charge a government contract when they are actually working on commercial projects has committed a federal crime. Beyond prosecution, the government can suspend or debar (exclude for a specified period, typically three years) a contractor from all federal contracting based on labor mischarging, which is effectively a corporate death sentence for a company whose revenue depends on government work.

What timekeeping software should a government contractor use?

The choice of software depends on the contractor’s size, contract volume, and budget. No specific software is required by DCAA. What matters is that the system, whatever it runs on, can enforce daily entry, support supervisor approval workflows, maintain a complete audit trail for corrections and transfers, link timesheet data to payroll and cost accumulation, and produce reports that DCAA can trace from individual timesheet entries to contract invoices.

Deltek Costpoint is the most widely used system in the defense and government contracting space. It integrates timekeeping, job costing, indirect rate management, and billing in a single platform designed for DCAA compliance, with system-level enforcement of daily entry, supervisor approval, and correction audit trails. The limitation is cost: Costpoint licensing and implementation can run into six figures, which prices out small contractors. Unanet is a cloud-based alternative for small and mid-size contractors, with lower cost and no on-premise infrastructure requirement. PROCAS and Jamis Prime are additional options in the same space.

For very small contractors (under 20 employees, one or two contracts), simpler tools can work if properly configured. QuickBooks Time (formerly TSheets) supports daily entry, supervisor approval, and basic audit trail functionality. Even Excel-based timekeeping can pass DCAA audit for a very small contractor if the spreadsheets enforce daily entry (date-stamped), include supervisor approval, preserve correction history (no overwriting cells), and map to the charge number structure. The risk with Excel is that it relies entirely on manual discipline. As the contractor grows beyond a handful of employees, a purpose-built system becomes necessary.

Whatever system the contractor selects, it must integrate with the accounting system that produces contract billings. The flow is: employee records time, supervisor approves, approved time feeds to payroll, payroll feeds to the job cost ledger (distributing labor costs to contracts and indirect pools), and the job cost ledger feeds to the billing system. If any link in that chain is manual, reconciled after the fact, or undocumented, the auditor will test it and potentially find it inadequate.

What written timekeeping policies does DCAA expect?

DCAA expects every government contractor to maintain a written timekeeping policy that employees are trained on and that the contractor actually follows. The policy does not need to be lengthy for a small contractor, but it must cover specific topics, and the auditor will test whether actual practice matches the written policy.

The policy should address daily recording requirements (when time must be entered, the grace period if any), the charge number structure (what the numbers represent, how employees select them), supervisor approval (who approves, when, what they are certifying), correction and transfer procedures (how to correct an error, what documentation is required, who approves), total time accounting (the requirement to record all hours, categories of indirect and leave time), and uncompensated overtime (the requirement for salaried exempt employees to record all hours worked).

The policy should also address prohibited practices: employees may not charge time to a contract they did not work on, may not accept direction to mischarge, may not pre-fill timesheets with planned hours, and must report any pressure to mischarge through the company’s ethics channel. Including these prohibitions in writing and covering them in annual training establishes that the contractor communicated the rules. This matters in a False Claims Act investigation, because it bears on whether the contractor “knowingly” permitted mischarging.

How often should a contractor train employees on timekeeping?

Annual training is the minimum. Most DCAA auditors expect to see evidence of initial training (when the employee is hired or first begins charging government contracts) and annual refresher training for all employees who charge time to government contracts.

The training should cover the daily recording requirement, total time accounting, the correction procedure, the prohibition on pre-filling and mischarging, the ethics reporting mechanism, and the consequences of labor mischarging. A focused 30- to 60-minute session, with a sign-in sheet and training materials retained in the compliance file, satisfies the requirement. New employees should receive timekeeping training within their first week, before they begin recording time.

Training records (dates, attendees, topics covered, materials used) should be retained for at least three years. DCAA may request them during a system audit or floor check, and the inability to produce them undermines the contractor’s assertion that employees understood the rules.

How should the charge number structure be organized?

The charge number structure is the bridge between the timekeeping system and the cost accounting system. Each charge number corresponds to a cost destination: a specific contract and task, an indirect cost pool, or a leave category. The structure must be detailed enough to support the cost accumulation requirements of each contract and clear enough that employees can select the right charge number without guessing.

For direct contract charges, the typical structure includes a charge number for each contract and, within each contract, a charge number for each task, CLIN (contract line item number), or work breakdown structure element that the contract requires separate cost tracking for. A contract with three task orders and two CLINs per task order might have six direct charge numbers. The level of detail depends on what the contract’s reporting requirements specify.

For indirect charges, the structure should provide a charge number for each indirect cost pool (fringe, overhead, G&A at minimum, with subcategories for B&P, IR&D, and training if tracked separately). For leave, the structure should include charge numbers for each leave type (PTO, holiday, sick, jury duty, bereavement, military) because different leave costs may flow to different pools depending on the contractor’s policies.

The charge number list should be reviewed and updated whenever a new contract is received or an existing one ends. Employees should have access to a current list with descriptions. Stale charge numbers should be closed in the system so employees cannot charge time to them.

What should a contractor do if DCAA finds timekeeping deficiencies?

The first step is to read the audit finding carefully and understand exactly which criteria the auditor found deficient. Timekeeping findings can range from a narrow procedural gap (corrections not documented, for example) to a systemic inadequacy (no daily recording, no supervisor approval, no total time accounting). The severity of the finding determines the scope of the corrective action.

For a narrow finding (corrections not documented, for example), the corrective action is typically a procedure change, a software configuration update, retraining, and a lookback review of recent corrections. For a systemic finding (no daily recording, no supervisor approval, no total time accounting), the contractor may need to replace or significantly reconfigure its timekeeping software, rewrite its timekeeping policy, retrain all employees, and conduct a lookback to identify and correct mischarges. If the deficiency produced incorrect billings, the contractor must calculate and submit an adjustment.

The corrective action plan (CAP) goes to the administrative contracting officer (ACO). It should identify each deficiency, describe the corrective action, set a completion date, and state how the contractor will demonstrate compliance. DCAA conducts a follow-up audit to verify implementation. During the deficient period, the ACO may withhold up to 10% of interim payments, released once the system is restored to adequate status.

What are the best practices for floor check readiness?

Floor checks are unannounced, so readiness is a standing posture, not a preparation event. The goal is to ensure that at any given moment during the workday, every employee’s current activity matches their timesheet entry for that period.

The most important practice is cultural: employees must understand that their timesheet is a real-time record of what they are working on, not a plan or an estimate. If an employee’s schedule changes mid-day, the timesheet must be updated to reflect the actual work performed. Supervisors play a critical role here. A supervisor who actively manages assignments and checks in with employees creates an environment where timesheets are accurate by default. A supervisor who assigns work on Monday and does not check in until Friday cannot verify that timesheets match actual work.

For remote employees, the contractor should consider what corroborating evidence exists. Project management tools (Jira, Azure DevOps), source code repositories (commit histories), communication platforms (Teams or Slack timestamps), and document collaboration tools (SharePoint or Google Workspace edit histories) all support a timesheet entry. This evidence is not a substitute for the timesheet, but it is valuable if DCAA conducts a virtual floor check.

Periodic internal floor checks (conducted by the contractor’s own management, not by DCAA) are a best practice. Walking through the office once a month, asking a few employees what they are working on, and comparing the answers to timesheets identifies problems before DCAA does. Documenting the internal checks (date, employees interviewed, findings, corrective actions) adds to the compliance record.

How does timekeeping connect to the incurred cost submission?

The incurred cost submission is the annual filing that reports a contractor’s actual costs for the fiscal year. Labor costs, which flow directly from the timekeeping system, are the foundation of the submission. The chain is: timesheets record hours by charge number, approved timesheets feed to payroll (converting hours to dollars), payroll feeds to the job cost system (distributing labor dollars to contracts and indirect pools), and the job cost system produces the schedules in the incurred cost submission.

If the timekeeping system is unreliable, every number in the incurred cost submission that depends on labor data is unreliable. Direct labor costs by contract, indirect labor in overhead pools, the labor base used to compute fringe and overhead rates, and the total cost input used to compute the G&A rate all start from timesheets. DCAA often audits timekeeping as part of the incurred cost audit for exactly this reason: the auditor selects a sample of employees, traces their timesheet entries through payroll into the job cost ledger, and verifies that the hours and dollars reconcile. Unreconciled differences are treated as evidence that the cost accumulation is unreliable.

What is the relationship between timekeeping and time-based billing in other industries?

Timekeeping requirements for government contractors share structural similarities with time-based billing in other professional services industries, though the regulatory overlay is different. Law firm bookkeeping revolves around recording billable hours by client matter, with similar requirements for contemporaneous recording, matter-level detail, and partner review of time entries before billing. Construction prevailing wage compliance under the Davis-Bacon Act requires certified payroll records showing hours worked, wage rates, and job classifications for each worker, which is the construction industry’s version of total time accounting.

The distinction for government contractors is enforcement. A law firm that records time inaccurately loses revenue (underbilling) or faces fee disputes with clients (overbilling), but the consequences are commercial, not legal. A government contractor that records time inaccurately faces False Claims Act liability, criminal prosecution, and debarment. The stakes are categorically different, and the timekeeping system must reflect that difference in its controls, documentation, and audit trail.

What should I do next?

If you are setting up a timekeeping system for your first government contract, build the charge number structure, configure the software for daily entry and supervisor approval, write the timekeeping policy, and train your employees before contract performance begins. Do not assume that your commercial timekeeping practices will satisfy DCAA. If you already have government contracts and are unsure whether your timekeeping system meets DCAA standards, run an internal audit: pull a sample of timesheets, check for daily entry dates, supervisor approvals, documented corrections, and total time accounting, and trace a few employees’ time through payroll into the job cost ledger to see if the numbers reconcile.

The following guides cover related accounting and compliance disciplines:

• DCAA compliant accounting system requirements, the full accounting system adequacy framework that timekeeping plugs into
• DCAA audit process and preparation, what to expect when DCAA schedules an audit and how to prepare
• Government contract direct vs indirect costs, the cost classification system that the charge number structure must support
• Law firm bookkeeping, the time-based billing parallel in professional services
• Construction prevailing wage, certified payroll as a parallel to government contractor total time accounting
• Government contractor proposal pricing, how the labor hours captured by the timekeeping system feed into fully burdened rates for cost proposals

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