Timekeeping Setup for DCAA Compliance

Estimated read time: 6 minutes

For government contractors, timekeeping is one of the most important parts of accounting system setup. Labor is often the largest cost on a contract, and the way employees record time can affect billing, indirect rates, contract profitability, and audit readiness.

A commercial business may only need time records for payroll. A government contractor usually needs more detail. The company must show which hours were worked on which contract, project, task, indirect activity, leave category, or internal function. That information then flows into payroll, job costing, labor distribution, billing, and financial reporting.

This is why timekeeping is not just an HR or payroll task. It is a compliance control.

DCAA guidance emphasizes that labor charging should identify employee labor by intermediate or final cost objectives. In plain English, that means the system should show where the labor belongs. Did the employee work on a specific contract? An indirect project? Administrative work? Paid leave? Business development? Internal training?

If the timekeeping system does not answer those questions clearly, the accounting system may not produce reliable labor cost data. That can create problems when preparing invoices, reviewing indirect rates, supporting proposals, or responding to audit questions.

The Core Concept: Compliant vs. Risky Timekeeping Practices

A DCAA-ready timekeeping process should be clear, consistent, and easy for employees to follow. It should also create a reliable audit trail from the employee’s time entry to payroll, project accounting, billing, and reporting.

Area	Compliant GovCon Practice	Risky / Non-Compliant Practice
Daily entry	Employees record time daily to the correct project, contract, or indirect code.	Employees enter time at the end of the week or from memory.
Employee responsibility	Employees certify that their timesheets reflect actual work performed.	Managers or admin staff complete timesheets for employees.
Supervisor approval	Supervisors review and approve timesheets after employee entry.	Timesheets are approved automatically or not reviewed.
Project codes	Employees have clear project numbers, contract names, and descriptions.	Employees guess which code to use or use broad “general” codes.
Time changes	Corrections show the original entry, corrected entry, reason, and employee concurrence.	Timesheets are edited without documentation or approval.
Direct vs. indirect labor	Time is charged to the proper direct or indirect cost objective.	All labor is posted to payroll without project or indirect detail.
All hours worked	Paid and unpaid hours are addressed according to company policy and contract requirements.	Only paid hours are tracked, even when additional hours affect labor rates.
Training and policy	Employees are trained on timekeeping rules and expectations.	Employees learn timekeeping informally or only after mistakes occur.

The core idea is simple: employees should record what they actually worked on, when they worked on it, and where the time belongs. The process should not be driven by available funding, budget pressure, convenience, or billing goals.

Step 1: Build the Right Timekeeping Codes

The first step is to build timekeeping codes that match the way the company performs work. These codes should align with the accounting system, chart of accounts, contracts, indirect pools, and payroll process.

At a minimum, a GovCon contractor should consider codes for:

Direct contract work
Task orders or CLINs, when needed
Indirect labor
Administrative labor
Business development or proposal support
Training
Paid leave
Holiday or PTO categories
Unallowable or non-billable activities, when applicable

The goal is not to create hundreds of confusing codes. The goal is to give employees enough detail to charge time correctly. A smaller contractor may only need a simple structure at first, while a larger contractor may need codes by contract, project, labor category, location, or cost objective.

Each code should include a clear description. Employees should not have to guess what “Project 101” or “Admin 2” means. The company should maintain a current project code list and update it when new contracts, tasks, or internal activities are added.

Step 2: Create Written Timekeeping Procedures

The next step is to document the rules. Employees need to understand how and when to record time, which codes to use, how to correct errors, and who approves the timesheet.

A written timekeeping policy should explain:

Employees are responsible for entering their own time.
Time should be recorded daily.
Time should be charged based on the work performed.
Supervisors should review and approve timesheets.
Timesheet changes must be documented.
Employees should certify their time at the end of the period.
All hours worked should be addressed according to company policy and contract requirements.

This policy should be part of employee onboarding and refreshed regularly. It is especially important when a company hires new staff, wins a new contract, moves into T&M or cost-reimbursement work, or changes timekeeping software.

The policy should also explain what employees should do if they are unsure which code to use. Guessing creates risk. A simple escalation process, such as asking the project manager or accounting lead before submitting time, can prevent errors.

Step 3: Review, Approve, and Reconcile Time Regularly

A timekeeping system is only effective if the data is reviewed. Supervisors should confirm that employees charged the correct projects or indirect activities. Accounting should confirm that approved time flows properly into payroll, labor distribution, job costing, and billing.

Each pay period, the company should check for:

Missing timesheets
Late submissions
Incorrect project codes
Unusual labor charges
Unauthorized changes
Direct labor charged to the wrong contract
Indirect labor charged as direct
Time that does not match project staffing or labor categories

This review process helps catch issues early. For example, if an employee charges time to a direct contract while performing internal administrative work, the labor cost may affect billing and project profitability. If an employee enters time late from memory, the accuracy of the record may be questioned. If supervisors approve without reviewing, the approval process loses value.

For T&M and labor-hour contracts, timekeeping also supports billing. FAR 52.232-7 requires vouchers to be supported by evidence such as individual daily job timekeeping records, labor category qualification records, or other contracting officer-approved substantiation. That means the timekeeping system should support not only payroll, but also the invoice backup.

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A strong timekeeping setup helps government contractors connect employee labor to the right contract, indirect pool, billing record, and financial report. It also gives leadership better visibility into project performance and labor cost trends.

The best time to fix timekeeping is before an audit, invoice issue, or labor-charging question appears. When employees understand the process and the system supports the rules, timekeeping becomes a practical compliance tool instead of a recurring cleanup problem.

Sources & Further Reading

This article is based on publicly available government guidance and official acquisition resources, including:

DCAA Pre-award Accounting System Adequacy Checklist — guidance used to evaluate whether a contractor’s accounting system is designed to meet SF 1408 expectations.
DCAA Manual 7641.90, Information for Contractors — DCAA contractor guidance covering accounting system expectations, labor charging, timekeeping procedures, labor floor checks, and audit readiness.
FAR 16.301-3, Limitations on Cost-Reimbursement Contracts — explains when cost-reimbursement contracts may be used, including the need for an adequate accounting system.
FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts — includes voucher substantiation requirements for T&M and labor-hour contracts.
FAR 52.237-10, Identification of Uncompensated Overtime — addresses uncompensated overtime and related proposal disclosures.
FAR 31.201-2, Determining Allowability — explains standards for determining whether costs are allowable.

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What’s Next in the Series

✅ GovCon Systems Setup & Configuration Series #1: GovCon Accounting System Setup – DCAA Basics
✅ GovCon Systems Setup & Configuration Series #2: How to Set Up a DCAA-Compliant Accounting System
✅ GovCon Systems Setup & Configuration Series #3: GovCon Chart of Accounts: Setup Guide
✅ GovCon Systems Setup & Configuration Series #4: Direct vs. Indirect Costs: GovCon System Setup
✅ GovCon Systems Setup & Configuration Series #5: GovCon Cost Pools: How to Configure Them
✅ GovCon Systems Setup & Configuration Series #6: Timekeeping Setup for DCAA Compliance
7️⃣ GovCon Systems Setup & Configuration Series #7: Labor Distribution Setup for GovCon Contractors
8️⃣ GovCon Systems Setup & Configuration Series #8: GovCon Audit Readiness: System Setup Checklist

References:

DCAA Pre-award Accounting System Adequacy Checklist (SF 1408): DCAA Official Checklists
DCAA Manual 7641.90: Information for Contractors on Labor Charging and Timekeeping Controls.
Acquisition.gov FAR 52.232-7: Voucher Substantiation Requirements for Time-and-Materials and Labor-Hour Contracts.
DFARS 252.242-7005: Contractor Business Systems and Mandatory Billing Withholds.