Timekeeping for Government Contractors Mike Mardesich & Brad Tress March 28, 2017 The Fundamentals of Government Contracting Webinar Series 1
Your Presenters Mike Mardesich Dixon Hughes Goodman LLP 703.970.0508 mike.mardesich@dhgllp.com Brad Tress Dixon Hughes Goodman LLP 703.226.0043 brad.tress@dhgllp.com 2
Fundamentals of Government Contracting Season 2 Subject Matter Season 2 topics will include: Year End Closing Contract Types and Associated Risks Indirect Rates Timekeeping Introduction to the Cost Accounting Standards Incurred Cost Submissions Unallowable Costs Contractor Compensation Labor Law Compliance Budgeting and Provisional Rates Accounting Systems Procurement Systems Estimating Systems 3
Agenda Review of rules and regulations that impact timekeeping practices and accounting processes What is a timesheet? Overview of timekeeping roles and responsibilities Time accounting methods acceptable by the government audit community DCAA floor check requirements and expectations Time reporting solutions manual and electronic timekeeping FAQs of Labor Reporting Labor cost distribution Total-time-accounting and its impact on labor cost Direct versus indirect labor costing Training and self-assessments to determine the strength of your controls over labor costs 4
Why Is Timekeeping Moving into the Forefront? For the past decade DCAA has been behind on Incurred Cost Audits In addition, DCAA did not perform real-time employee interviews/floorchecks to validate: Employee attendance Employee performing assigned job classifications Time is charged to the proper cost objective DCAA issued a guidance memo 13-PPD- 012(R) to provide alternate procedures for existence and allocability 5
Regulations Over Timekeeping None 6
Guidance over Timekeeping Standard Form 1408 Pre-Award Survey of Contractor Accounting System e. A timekeeping system that identifies employee s labor by intermediate or final cost objective. f. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives. Internal Control expectations FAR 31.201-2(d) & FAR 52.222-8 Records DCAA Guidance Internal Control Questionnaire (ICQ) Contract Audit Manual Ch 5. Sec 9 Guidance for Contractors Audit Programs and Mandatory Annual Audit Requirements Contractor Risk Assessment Guide (CRAG) 7
CRAG - Controls Over Timekeeping CONTROL OBJECTIVE - Establish timekeeping and labor charging practices which result in the accurate assignment of allowable and allocable labor costs to U.S. Government Contracts. MAJOR CONTROLS Policies and Procedures. Provide adequate written policies and procedures for instructing employees on the proper charging of direct and indirect labor, and to reasonably assure the accuracy of recorded time charges to cost objectives. Internal Controls. Provide for a system of internal controls to include: the maintenance of accurate labor cost data, the accumulation and recording of labor costs allocable to cost objectives for the purpose of determining proper cost reimbursement on government contracts, the verification of labor cost transfers, and the segregation of responsibilities for labor related activities. 8
General Controls - Continued Orientation and Training: establish a labor charging awareness program to train all employees, as appropriate, on proper labor charging practices. Time card Preparation: assure that labor hours are accurately recorded and that any corrections to timekeeping records are documented including the appropriate authorizations and approvals. Allocation of Labor Costs to Cost Objectives: reasonably assure the proper allocation of labor costs to cost objectives. Validation of Undistributed Labor: provide reasonable assurance that labor transfers or adjustments of the labor distribution are documented and approved. Internal Reviews: monitor the overall integrity of the labor/timekeeping system. 9
Auditor Expectations - Controls Timekeeping Procedures described in DCAA Guidance for Contractors. To be effective, DCAA expects internal controls over labor charging to meet the following criteria: Should be a segregation of responsibilities for labor-related activities. Procedures must be evident, clear-cut, and reasonable so there is no confusion. Maintenance of controls must be continually verified and violations must be remedied through prompt and effective action. Individual employees must be constantly, although unobtrusively, made aware of controls that act as an effective deterrent against violations. Many businesses accomplish this by emphasizing the importance of timesheet preparation in staff meetings, employee orientation, and through the posting of signs throughout the workplace that remind employees of the importance of accurate and current timesheets. 10
Auditor Expectations Timesheet Preparation Detailed instructions for timesheet preparation should be established through a timekeeping manual and/or company procedure. Instructions should indicate that the employee is personally responsible for: Recording his/her time on a daily basis. Recording time on the timesheet. The correct distribution of time by project numbers, contract number or name, or other identifiers for a particular assignment. 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. 11
Auditor Expectations Approval A supervisor should approve and cosign, all timesheets. A supervisor is prohibited from completing an employee's timesheet unless the employee is absent for a prolonged period of time on some form of authorized leave. If the employee is on travel status, the supervisor for the employee may prepare a timesheet. Upon his or her return, the employee should turn in his/her timesheet and attach it to the one prepared by the supervisor. The guidance should state that the nature of the work determines the proper distribution of time, not availability of funding, type of contract, or other factors. The company policy should state that the accurate and complete preparation of timesheet the employee's responsibility. Careless or improper preparation may lead to disciplinary actions under company policies, as well as applicable Federal statutes. 12
Auditor Expectations Corrections Purpose of correcting timesheet is to document the process of payroll correcting a timesheet error. Employee is responsible for accurate time reporting. If an employee realizes a timesheet is not correct: Identify what needs to be corrected Correct the timesheet in accordance with established practices Notify the manager a correction is needed 13
Examples of Timesheets 14
Roles in the World of Timekeeping Federal contractor Employee Supervisor Tone from the top! Federal Government Contracting Officers Department of Labor Auditor (Defense Contract Audit Agency DCAA) Inspector General 15
Federal Contractor Employee Consistently follow established procedures Record time promptly and accurately Approve time charges Supervisor Monitor compliance Approve time charges Contractor Provide Tone from the Top Comply with applicable laws and contract requirements Maintain policies, systems, training Internal review or Internal audit 16
Government Procuring Contracting Officer Determines applicability of SCA Obtain certified payrolls for DBA Determines rates proposed are fair and reasonable Administrative Contracting Officer Review and approve contractor compensation policies Determines if rates paid are fair and reasonable Department of Labor Created to foster, promote and develop the welfare of workers, improve working conditions, and enhance opportunities for profitable employment Implements, administers and enforces labor laws Oversees compliance with FLSA and SCA in Federal contracts (FAR Part 27) 17
Auditor (Defense Contract Audit Agency DCAA) Created to perform contract audits for Department of Defense Advisor to the Contracting Officer Timekeeping and Labor Audits Floor checks Compensation Impact on DFARS Business System Rule Incurred cost audits Auditing labor costs Executive compensation audits Time & Materials audits 18
Floor Checks Only unannounced audit Floor Check Questionnaire Will ask about Ethics Program Will ask to see Timekeeping training records You need a Company Liaison Deliver a sample list from your data Pull the timesheet when they arrive Use documentation aids to help employees pass 19
Inspector General Handbook of Fraud Indicators Reports on Programs Identified: Personnel did not always record employee direct labor correctly or have adequate documentation to support it. Supervisors did not always segregate the timekeeping duties. Employees did not certify the time they worked on projects. Supervisors did not always have adequate oversight of contract labor hours, which personnel did not always record correctly. Production controllers did not track material usage and did not consistently order material against the correct projects. Parts managers did not consistently review orders with a Depot Overhaul Factor of 0.00000 for accuracy. Journal voucher preparers did not always have adequate or clearly identified documentation to support cost transfers between projects. 20
Total Time Accounting DCAA Expectations: Recording all hours worked whether they are paid or not. Labor costs and associated overheads are affected by total hours worked, not just paid hours worked. Labor rate computations and labor overhead costs should reflect all hours worked. Unpaid hours worked are termed "uncompensated overtime." 21
Uncompensated Overtime DCAA Accepted Methods Average Labor Rate Adjustment Percentage Allocation Method Estimated hourly rate and overhead adjustment Alternative Methods Other methods of accounting for excess hours worked by exempt employees may be used by the contractor. Some of these are unacceptable and others require further evaluation to determine acceptability such as: distributing salary cost to all cost objectives based on a labor rate predicated on an 8-hour day/40-hour week and crediting the excess amount distributed to overhead. determining a pro rata allocation of hours worked each day and distributing the daily salary cost using the pro rata allocation (use of daily distribution increases the possibility for "gaming"). Evaluation should be made of the method to determine the significance of any inequities which may result. 22
Proposal Evaluations DCAA Guidance for Contractors FAR Table 15-2 Expectations Identification of Uncompensated Overtime FAR 52.237-10 23
Auditor Areas of Concern Total hours in timekeeping should reconcile to labor distribution and payroll. Tracking of labor costs directly associated with unallowable costs are recorded. Documenting and approving labor transfers. Audit trail of timekeeping documents. Risk Factors: Contract type mix Contracts in an overrun position Budgetary controls Similar scopes for cost type and fixed price contracts 24
Questions? 25
The Fundamentals of Government Contracting Webinar Series Join us next month for An Introduction to the Cost Accounting Standards on Tuesday, April 25 th 26
22 nd Annual Government Contracting Update DHG s 22 nd Annual Government Contracting Update: shaping today s challenges into tomorrow s success When: May 4 th, 2017 Where: The Hyatt Regency in Tysons Corner, VA CPE: 8 hours (pending approval) Visit: www.dhgllp.com/govcon to learn more! 27