There’s no doubt that the bidding process has become more competitive,” says Ken Malach from IT firm CRI Advantage. ‘There are more companies in the marketplace competing for fewer contracts, so the competition is increasing.
All of which means it’s more important than ever to keep on top of Defense Contract Audit Agency (DCAA) compliance rules—otherwise known as the Federal Acquisition Regulations—if you want to get ahead in a crowded market.
What is DCAA compliance?
The DCAA was set up in the 1960s to standardize the government’s contract auditing process and ensure taxpayers get good value for money.
As the name suggests, the DCAA originally just oversaw military and intelligence contracts for the U.S. Department of Defense, but later become the gateway to many other kinds of labor and service contracts that the U.S. government signs with commercial suppliers. This said, defense contracts still account for 90 percent of the DCAA’s work.
The DCAA’s regulations are far–reaching and to ensure you fully comply with them we recommend you get professional advice, but to get you started on the time tracking side of things, we’ve put together this 10–point DCAA compliance checklist for you.
1. Does everyone know the rules?
There’s no escaping it. When you win a government contract, the DCAA’s time tracking rules apply to everyone in your company.
No matter what size your company is, this can be a big ask—with lots of training implications. So it pays to make time tracking as simple as possible and to do your research, as DCAA compliance expert Mike McNew explains:
Many timekeeping companies offer expensive and complicated packages and software that claim to be DCAA compliant, but that really only complicate the day–to–day tracking, management and reporting it takes to protect against audits in the real world.
He adds, “TSheets is different. It’s easy for supervisors and employees to use and understand, while providing the pinpoint accuracy, record keeping detail and audit trail the government requires.”
The DCAA has its own checklist to make sure your training and procedures are up to snuff—including staff meetings, company manuals, and signage—all of which are set out in the agency’s Information For Contractors manual. It’s worth sharing this manual and if you can, break the relevant bits down into bitesize chunks for your employees to read, because if you get a visit from a DCAA auditor (more on this below) they could be the ones answering the questions, not you.
2. Are your timesheets updated every day?
The second rule of DCAA compliant time tracking is that every employee must complete their own timesheet each day with an accurate record of their hours.
To make it easier to meet DCAA compliance rules like this, many companies, like CRI Advantage, are switching away from paper timesheets to digital alternatives. A big advantage of storing your records securely online is that they can be updated anytime, anywhere. The timesheets are always legible, they can’t be tampered with (TSheets keeps an uneditable log of all time data and edits), they come with daily reminders that are easy to set up, and they will prevent your employees from adding hours they haven’t completed yet.
This last point is a big one for the DCAA. Your hours need to be tracked in real time, as they happen, to give a true picture of your labor costs.
3. Can you allocate time to different projects?
When you work on a DCAA contract, the government doesn’t just want to know how long your employees have been at work each day—it also wants to see exactly how much time they spend on each project.
The DCAA’s advice here is clear. “To ensure accuracy, a listing of project numbers and their descriptions should be provided to the employee and maintained in the work authorization system electronically or in a hard copy for the employee to refer to it as needed.”
So it makes sense to set up a time tracking system with all your job codes built into it from the start and to be able to add new codes easily as you start new projects.
4. Do you have a clear approval process?
The DCAA places most of the responsibility for time tracking on whoever actually works the hours that end up on the daily time card, but managers also have an important role to play—because it is their responsibility to approve timesheets at the end of every work period.
Which takes us right back to rules No.1 & 2: Is everyone in your company aware of your company’s time tracking procedures? Are you making it as easy as possible for them to keep an accurate, real-time record of their hours? And lastly, is it easy for managers to view and approve time without digging through a pile of paperwork?
It also helps to have a system that can quickly produce detailed reports to show exactly who has submitted their time and whose time has been approved. This way, you can close any gaps in your records before the auditors get involved.
5. Are you tracking overtime?
If you get audited by the DCAA, your labor costs will be based on the total number of hours your employees work, not the number of hours they actually get paid for. This is particularly relevant when you have salaried employees because the two numbers won’t always be the same.
The calculations are done this way to reduce the risk of labor accounting fraud, and the upshot is that you need to know exactly how much overtime all of your employees are putting in—whether they are paid by the hour or not. This is commonly known as “total time accounting.”
The important distinction here, which is laid out in the Fair Labor Standards Act, is between what’s known as “uncompensated overtime” and “unpaid overtime.” The former applies to employees who get paid the same amount no matter how many hours they work—so any overtime goes “uncompensated.” The latter refers to overtime that should be paid to the employee because they are contracted by the hour or day and their job falls outside of the FLSA’s overtime exemptions.
Beth Damis, corporate comptroller who does a lot of DCAA compliance work, explains how this works in QuickBooks.
You need QuickBooks to be recording an actual dollar value to the project, not an allocated dollar value to the project, not a standard hourly rate (unless you are making an adjustment to compensate for overtime variables). This is because the employee’s average hourly rate can vary based on the number of hours they work in a pay–period due to paid or unpaid overtime.
She adds, “It can get a lot more complicated for contractors who are paying their employees an overtime rate because when they do pay overtime, instead of reducing their labor pools they are increasing their labor pools.”
If you don’t track all of this correctly, Beth warns, “In a DCAA audit they could either say ‘we overpaid you and you have to pay us this money back,’ or ‘you undercharged us based on your overhead rate.'”
6. Are you tracking time off?
As well as overtime, your timesheets need to include a complete record of any unworked compensation your employees receive, such as paid time off.
“You have to track unworked compensation such as holidays, vacation, bereavement, and sick time, because like overtime, that also affects your labor pools,” Damis explains.
The good news is, with the right time tracking system, it is easy to track overtime and paid time off. But at the other end, DCAA compliance can still make for some tricky accounting, so it is always a good idea to get professional advice to make sure your payroll is DCAA compliant.
“The fastest way to go out of any business is to be out of compliance with payroll,” Damis warns.
“Any business that is running payroll should hire someone, even if it’s a consultant or part-time CFO, to help their bookkeeper and make sure the company is in compliance with all the federal, state, and local regulations.”
7. Are you managing time tracking and payroll correctly?
The DCAA audit manual is very clear that “the responsibility for timekeeping and payroll accounting should be separated.”
For all but the smallest companies, “Supervisors who are accountable for meeting contract budgets should not have the opportunity to initiate employee time charges.”
In other words, whoever approves your timesheets should not be running your payroll. But that doesn’t mean you can’t connect your time tracking system to your payroll system, which can be a huge time and money saver.
The other big wins, according to Damis, come from having good procedures in place, being consistent, and keeping transparent records.
“These things apply across the board,” she explains.
“What the DCAA auditors are looking for is that you have the processes in place—and actually these need to be recorded processes—that are used globally throughout your business by every single employee, no matter what level that they are working at, and that everyone is being consistent at following the policy. So yes, it’s important to record your time and yes, it’s important to have the right notes, and to record it all on the correct jobs, but the most important things are processes and consistency.”
It all comes down to training, she says.
“That becomes a problem for some small businesses. Especially if you’re having one person do everything. A lot of my job is spent reading the regulations and then putting that into processes and methods that are generic enough to apply across the board and painless enough that all employees will actually follow them.”
8. Are your records accurate?
The penalties for “labor mischarging,” as the DCAA calls it, range from a fine to five years in prison—not to mention the fact that you’re also likely to lose your hard–won government contract.
The responsibility here goes right down to whoever has actually filled out, or approved, a timesheet. So if an employee knowingly provides false information, or approves a timesheet knowing it isn’t correct, they could be liable to prosecution under Section 1001, Title 18 of the United States Code, as could the company if senior managers are aware that any invoices have been submitted with incorrect fees.
From an accountant’s perspective, middle managers are absolutely crucial here, because they are the ones closest to the issue and best placed to correct any mistakes.
“Your approver is critical,” adds Damis, “because they have a direct relationship with the employees who are submitting time and should also be training those employees, every week if needed, so that by the time the payroll is run there are no changes to be made because if there are, that screams lack of consistency in adhering to procedures.”
9. Do you have a good audit trail?
You have a perfect record of the hours your employees have worked on each project. You know whether their time has been approved or not, and who has approved it. But have you also tracked any changes that have been made to your employees’ timesheets, who made them, and why? This can be the most complex area of DCAA compliance when it comes to time tracking.
But it doesn’t have to be.
To be DCAA compliant, managers can’t complete other employees’ timesheets but they can correct errors on them. Be aware, however, that if they do, and you get a DCAA audit, the agency will want to know the full context of when and why those changes were made. You’ll also need to demonstrate that you have told the employee why their timesheet was edited so they can contest the changes if they want to.
This can mean a lot of extra paperwork, which is another reason to consider a time tracking system that securely stores all of this information online so you can get immediate access to it whenever, and wherever, you want.
10. Are you ready for a DCAA audit?
It doesn’t matter whether you have just won a government contract, were recently audited, or whether you won the contract a long time ago—you always need to be prepared for a DCAA audit. This is when the inspectors show up at your job site or office one day with a long checklist and lots of questions.
DCAA audits are called “floor checks” and may also involve email or phone interviews with your employees to determine how well they know your time tracking procedures and whether those procedures are being followed.
As ever with DCAA compliance, it pays to know the details.
Further Reading and Resources
- DCAA audit manual (Information for Contractors, see pages 15-17, Labor Charging System)
- Federal Acquisition Regulations
- Code of Federal Regulations
- Office of Federal Procurement Policy
- National Veterans Small Business Engagement
- Federal Business Opportunities