DCAA compliant timekeeping is the single most audited function in government contracting. DCAA reviews labor records in virtually every accounting system audit, floor check, and incurred cost audit. A non-compliant timekeeping system does not get a warning. It gets a finding, and the finding puts every hour of labor you billed at risk.
DCAA-compliant timekeeping requires daily time entry by each employee, allocation to specific contracts or indirect accounts, supervisor approval, and an unalterable audit trail per CAM Section 6-406. Labor typically represents the largest direct cost on government contracts, making timekeeping the most frequently audited area. DCAA evaluates compliance against DFARS 252.242-7006 accounting system criteria during pre-award surveys and incurred cost audits.
This is not an abstract compliance exercise. Labor typically represents 60% to 70% of total costs on service contracts. When DCAA questions your timekeeping, they question the majority of your billings. Amerifusion Bookkeeping has set up DCAA-compliant timekeeping systems for contractors ranging from 5-person startups to 50-person firms. The requirements are the same regardless of size. The consequences of non-compliance scale with your contract value.
The Six Requirements of DCAA Compliant Timekeeping
DCAA evaluates timekeeping against criteria in the Contract Audit Manual (CAM) Section 6-406 and DFARS 252.242-7006. Six specific requirements must be met. Missing any one of them exposes your entire labor billing to scrutiny.
1. Daily Time Recording by the Employee
Each employee must record their own time daily. Not weekly. Not at the end of the pay period. Daily. This is the requirement most contractors violate because it feels burdensome. DCAA treats retroactive time recording (filling in Monday’s hours on Friday) as unreliable, because memory deterioration over even 24 hours introduces errors in charge code allocation.
The practical standard: employees enter their time before leaving work each day, or by the start of the next business day at the absolute latest. Any system allowing batch entry for an entire week fails this test.
2. Charge Codes for Every Cost Objective
Your timekeeping system must include charge codes for every active contract (direct labor), every indirect cost pool (overhead, G&A, IR&D, B&P), and uncompensated overtime if applicable. An employee working on Contract A in the morning and overhead tasks in the afternoon must charge each block of time to the correct code.
The charge code structure must match your accounting system’s job cost structure. If your chart of accounts tracks costs by contract number, your timekeeping charge codes must use the same contract numbers. Mismatches between timekeeping and accounting are a common audit finding.
3. Supervisor Approval
Every timesheet must be reviewed and approved by the employee’s supervisor before the hours feed into cost accumulation and billing. The supervisor’s role is to confirm the employee worked the hours recorded and charged them to the correct contracts and indirect pools.
Approval must be documented. A verbal “looks good” is not compliance. The supervisor must sign (physically or electronically) the timesheet, and the system must record who approved, when, and what was approved.
4. Audit Trail for All Corrections
When an employee or supervisor corrects a time entry, the system must preserve the original entry, the corrected entry, the reason for the correction, and the identity of the person who authorized the change. Overwriting the original entry without a trail is a critical deficiency.
This requirement exists because labor mischarging between contracts is one of DCAA’s primary fraud indicators. A system without correction audit trails cannot distinguish between honest mistakes and deliberate cost shifting.
5. Total Time Accounting
Employees must account for all hours in their standard work week, not only billable or direct hours. If an employee works 40 hours, all 40 must appear on the timesheet: 32 direct on Contract A, 4 overhead, 4 G&A training. Gaps in total time suggest hours are being selectively recorded rather than completely captured.
Salaried exempt employees present a specific challenge. Even though they are not paid by the hour, DCAA requires them to record actual hours worked because their labor costs are allocated to contracts based on hours. An exempt employee recording exactly 8.0 hours every day for six months raises an immediate red flag during an audit.
6. Written Timekeeping Policy
A written policy covering all five requirements above must exist, be signed by management, and be distributed to every employee. The policy must describe daily entry requirements, charge code structure, approval workflow, correction procedures, and the consequences of non-compliance.
DCAA does not accept informal practices as policies. “Everyone knows to enter their time daily” fails the audit. A two-page document signed by the owner, with an acknowledgment sheet showing every employee received and reviewed it, passes.
Timekeeping Software for Government Contractors
The right software makes compliance easier, but no software substitutes for discipline. DCAA does not certify or approve specific timekeeping products. The system must support the six requirements above. Several products are widely used in the GovCon community.
| Software | Best For | Key GovCon Features | Price Range |
|---|---|---|---|
| Unanet | Mid-size contractors (20+ employees) | Built-in charge codes, project costing, government-specific workflows, ICS-ready reporting | $$$ |
| Deltek Costpoint | Large contractors (50+ employees) | Full ERP with integrated timekeeping, labor distribution, indirect rate calculation | $$$$ |
| Hour Timesheet | Small contractors (under 25 employees) | DCAA-focused design, daily reminders, correction audit trails, floor check readiness reports | $$ |
| Procas | Small to mid-size (10 to 50 employees) | GovCon-specific time and expense, integrates with QuickBooks, project-level tracking | $$ |
| QuickBooks Time | Small contractors (under 15 employees) | Mobile time entry, GPS tracking, integrates with QuickBooks. Requires manual charge code configuration for GovCon compliance. | $ |
The common mistake: choosing software based on price or user interface without confirming it supports correction audit trails and supervisor approval workflows. A free spreadsheet with all six requirements met is more compliant than expensive software configured without audit trails.
The DCAA Floor Check: What to Expect
A floor check is an unannounced DCAA visit where auditors walk through your office and compare what employees are doing with what their timesheets say they are doing. Floor checks test the integrity of your timekeeping in real time.
During a floor check, DCAA auditors will:
- Interview employees individually. They ask: What are you working on right now? What charge code are you using? How do you record your time? When do you enter it? What happens if you make a mistake? The employee’s answers must align with both the timesheet records and the written timekeeping policy.
- Compare timesheet entries to actual work. If an employee says they are working on Contract A but their timesheet shows Contract B, that is a finding. If an employee says they entered time this morning but the system shows no entry for today, that is a finding.
- Review correction history. Auditors look at recent corrections to identify patterns. Frequent corrections from one indirect code to a specific direct contract suggest labor mischarging.
- Verify policy awareness. Employees who cannot describe the timekeeping policy indicate a training failure. DCAA interprets this as a systemic issue, not an individual one.
Floor checks are unannounced for a reason. DCAA wants to see normal operations, not a company performing for an audience. The only preparation is making compliance the daily standard, not a special event.
Setting Up Your System: Step by Step
If you are building a DCAA compliant timekeeping system from scratch, follow this sequence. Each step builds on the previous one.
- Define your charge code structure. List every active contract, every indirect pool (fringe, overhead, G&A, IR&D, B&P), leave categories (PTO, holiday, sick), and uncompensated overtime. Map these to your chart of accounts.
- Select your timekeeping software. Verify it supports daily entry enforcement, supervisor approval workflows, correction audit trails, and total time accounting. Configure charge codes to match your accounting system.
- Write your timekeeping policy. Cover all six requirements. Keep it to two to three pages. Include the consequences of non-compliance (DCAA audit exposure, potential disciplinary action).
- Train every employee. Walk through the policy, demonstrate the software, and practice entering time with correct charge codes. Document the training with sign-off sheets.
- Set up automated reminders. Daily notifications at end of day prompting time entry. Weekly supervisor reminders for unapproved timesheets. Monthly management reports flagging missing entries.
- Run a 30-day pilot. Monitor compliance daily for the first month. Address issues immediately. After 30 days, review the data for patterns: missing entries, late approvals, charge code errors.
- Establish ongoing monitoring. Monthly compliance reports tracking daily entry rates, approval timeliness, and correction frequency. Any metric trending below 95% needs immediate attention.
The setup takes two to three weeks for a small contractor. The pilot adds another month. By day 45, your system should be producing clean, auditable timekeeping data. Our 90-day accounting checklist covers timekeeping as part of the broader system setup.
Common Timekeeping Mistakes and How to Fix Them
| Mistake | Why It Is a Problem | The Fix |
|---|---|---|
| Weekly time entry | Memory deterioration makes charge code allocation unreliable after 24 hours | Enable daily lockout or automated end-of-day reminders. Make it a job requirement, not a suggestion. |
| Supervisor batch approval | Approving 20 timesheets at once without review is rubber-stamping, not oversight | Require supervisors to review and approve within 48 hours of submission. Flag stale approvals. |
| No correction audit trail | DCAA cannot distinguish corrections from labor mischarging without a trail | Use software with built-in correction logging. Require written reason for every change. |
| Exempt employees recording 8.0 daily | Signals time is recorded by policy rather than by actual hours worked | Train exempt staff to record actual hours. A salaried engineer working 9.5 hours records 9.5 hours. |
| Missing indirect time | Gaps between total hours and recorded hours suggest selective recording | Require total time accounting. All hours in the work week must appear on the timesheet. |
| No written policy | DCAA treats absence of written policy as a systemic deficiency | Write a 2-3 page policy. Sign it. Distribute to all employees. Collect acknowledgment signatures. |
The Cost of Timekeeping Non-Compliance
Timekeeping deficiencies are the most common trigger for DCAA material weakness determinations under DFARS 252.242-7006. The financial consequences are direct and quantifiable.
- Questioned labor costs. If DCAA determines your timekeeping is unreliable, they question the labor costs charged during the period of non-compliance. For a contractor billing $80,000 per month in direct labor, six months of questioned costs totals $480,000.
- Payment withholding. A material weakness determination triggers 5% payment withholding under DFARS 252.242-7005 until the deficiency is corrected. On $200,000 monthly billings, that is $10,000 per month in delayed cash flow.
- System remediation costs. Fixing a non-compliant timekeeping system after an audit finding costs $15,000 to $40,000 (typical range — actual costs vary by firm size and scope) when you include new software, policy documentation, employee training, corrective action plan preparation, and the verification review process.
- Lost future work. An inadequate system finding appears in your contractor performance record. Prime contractors and government contracting officers review this record before awarding new work.
The math is straightforward. Setting up a compliant timekeeping system costs $2,000 to $5,000 (typical for small contractors) and two to three weeks of effort. Fixing a non-compliant system after an audit finding costs five to ten times more and takes three to six months (varies with deficiency severity). Every contractor who waits pays the premium.
Frequently Asked Questions
Does DCAA require specific timekeeping software?
No. DCAA does not certify, approve, or require any specific timekeeping product. They evaluate whether your system, regardless of the software, meets the compliance requirements: daily entry, supervisor approval, correction audit trails, total time accounting, charge code accuracy, and a written policy. A properly configured spreadsheet-based system is compliant. An improperly configured enterprise system is not.
How often does DCAA conduct floor checks?
DCAA does not publish a floor check schedule because checks are designed to be unannounced. Frequency depends on your contract portfolio, past audit history, and DCAA’s risk assessment of your operations. Contractors with cost-reimbursable contracts should expect at least one floor check during the contract period. Contractors with prior timekeeping findings face more frequent visits.
Do firm-fixed-price contractors need DCAA compliant timekeeping?
FFP contracts carry the lowest timekeeping audit risk, but compliant timekeeping is still recommended. If your FFP contract is CAS-covered, timekeeping compliance is required. If you plan to bid on cost-type or T&M contracts, your timekeeping system must already be in place before the award. Building compliance habits on FFP work prepares you for higher-risk contract types.
What happens if an employee forgets to enter time for a day?
A missed day should be entered the following business day with a note explaining the late entry. The system must flag late entries distinctly from same-day entries. Occasional late entries are normal and acceptable. A pattern of late entries across multiple employees indicates a systemic compliance failure that DCAA will flag during an audit or floor check.
How do I handle timekeeping for remote employees?
Remote employees follow the same six requirements as on-site employees. Cloud-based timekeeping software with mobile access makes daily entry practical from any location. The key difference: floor checks for remote employees may involve phone interviews instead of in-person visits. Remote employees must still be trained on the timekeeping policy and able to describe their charge code assignments accurately.
Build the System Before the Auditor Tests It
DCAA compliant timekeeping is not optional for government contractors with cost-type or T&M contracts. It is not a best practice. It is a regulatory requirement that DCAA tests more frequently and more rigorously than any other area of your accounting system. The six requirements are specific, documented, and non-negotiable.
The investment is small relative to the risk. Two to three weeks of setup time and $2,000 to $5,000 in software and configuration costs protect your labor billings, which represent the majority of your contract revenue, from questioned costs and payment withholding.
Amerifusion Bookkeeping configures timekeeping systems as part of our CPA-managed compliance services. We select the right software for your size, write your timekeeping policy, train your employees, and monitor compliance on an ongoing basis. Start with the Compliance Readiness Check to assess your current timekeeping, or book a discovery call to discuss your setup needs.
