DCAA-Compliant Timekeeping: Why the Timesheet Is the Riskiest Document in Your Business

The one document an auditor trusts least

Ask anyone who has been through a government-contract audit which record gets picked apart the hardest, and the answer is always the same: labor. Materials have invoices. Subcontractors have their own invoices. Travel has receipts. But direct labor — usually the biggest cost on a services or engineering contract — is supported by one thing, a timesheet, and a timesheet is just an employee's assertion about how they spent their hours. There is no third-party receipt behind it. That is exactly why timekeeping is the most scrutinized area in the whole cost-accounting picture, and why a weak timekeeping process is the most common single reason a small contractor gets a finding.

The good news is that compliant timekeeping is not complicated. It is a small set of disciplines applied consistently, and most of them are things a well-run business should be doing anyway. The bad news is that "close enough" does not survive contact with a floor check. This article walks through what a defensible timekeeping system actually requires, why each piece exists, and how to run one without buying enterprise software. (This is general educational information about government-contract labor accounting, not compliance, legal, or contracting advice — the specific requirements applied to your business are judged by auditors against detailed criteria, so confirm the specifics with a qualified contract accountant.)

Total time accounting: every hour, not just the billable ones

The concept that trips up almost every newcomer is total time accounting. In commercial work you often only bother tracking billable hours — the time you charge a client. On a government contract that is not enough, and it is not even the point. The requirement is that all of an employee's worked hours are recorded and charged to a cost objective, whether those hours are billable or not.

Here is why it matters. Your indirect cost rates — overhead and G&A — are built by dividing a pool of indirect cost by a base, and that base is very often direct labor. If an employee works 50 hours in a week but only writes down the 40 they spent on a contract, the other 10 hours of effort vanish. Any indirect labor sitting in those missing hours never lands in the pool, and the labor base is understated. The rates come out wrong. Worse, if someone charges only billable time and lets the rest evaporate, they are effectively hiding uncompensated overtime in a way that distorts the cost of every contract. Total time accounting closes that door: 50 hours worked means 50 hours recorded, distributed across whatever the person actually did — direct contract work, bid and proposal, general administration, training, paid time off. Nothing is dropped.

Every hour lands in one of two kinds of buckets:

• Direct — hours worked on a specific contract, charged to that contract's charge code. This is the labor that flows straight to a job in your job-costing records.
• Indirect — hours that support the business but not one contract in particular: general administration (G&A), overhead activities, bid and proposal, paid time off. These land in the appropriate indirect category.

The principle is simply that no worked hour is unaccounted for, and no hour is charged to a contract unless it was actually worked on that contract.

The daily disciplines that make a timesheet defensible

What separates a timesheet an auditor believes from one they do not is a handful of habits. None of them is hard; all of them have to be real.

• Record time daily. The single most important habit. Time is entered the day the work happens, not reconstructed from memory at the end of the week or — the classic red flag — filled in for the whole pay period in one identical-looking block on the last day. Contemporaneous recording is what makes a timesheet evidence rather than a guess. Auditors can and do look at when entries were made.
• The employee records their own time. The person who did the work enters the hours. A supervisor does not fill in timesheets for the team, and one person does not enter time on behalf of others. The timesheet is the employee's personal assertion about their own labor.
• Charge to a specific, authorized cost objective. Every hour carries a charge code that points at a real contract or a real indirect category the employee is authorized to charge. People should not be charging to a contract they are not working on, and unauthorized or "parking lot" charge numbers are a serious problem.
• Corrections are visible, never erased. When an entry is wrong, you fix it in a way that preserves the original: the old value is lined through (or, in a system, retained in an edit trail), the correct value is entered, and the change is dated and, where required, explained and re-approved. You never white it out, delete it, or overwrite it so the original disappears. An audit trail on changes is the whole point.
• Supervisor approval. A supervisor with knowledge of the work reviews and approves the timesheet each period, confirming the hours and charges are reasonable. Approval is a control, not a rubber stamp.

Notice how much this looks like the tamper-evident, corrective-entry discipline that good accounting uses everywhere else: you do not rewrite history to make it look clean, you correct it in a way that shows what happened. Timekeeping is that same principle applied to labor.

The floor check: how it actually gets tested

The reason all of this has teeth is a procedure sometimes called a floor check (or a labor interview). An auditor shows up — often unannounced — and talks to employees directly. The questions are simple and hard to fake: What are you working on right now? What contract does it charge to? Where do you record your time? When did you last record it? Do you know how to correct a mistake? Then they compare the answers to the timesheets.

The point of a floor check is to test whether the timekeeping system is real or theatrical. A system where employees record time daily, know their charge codes, and understand the correction process passes without drama. A system where people fill in a whole week at once, do not know which contract they are on, or share login credentials falls apart in the first interview — no matter how tidy the spreadsheet looks. This is why a compliant system cannot be something the bookkeeper assembles at month-end; it has to be a habit lived by everyone who charges time, every day.

Write it down: the timekeeping policy

A compliant system needs a written timekeeping policy, and every employee who charges time needs to have read it and know it exists. It does not have to be long. It should state, in plain language:

• That time is recorded daily by the employee who worked the hours.
• That all hours worked are recorded and charged (total time accounting), not just billable time.
• How to select the correct charge code and that charging unauthorized codes is prohibited.
• How to make a correction — preserving the original entry, dated, and re-approved.
• That supervisors review and approve time each period.
• The consequences of falsifying a timesheet, because labor mischarging is one of the most serious things a contractor can do.

The written policy matters for two reasons. First, it makes the rules unambiguous, so "I didn't know" is not an available excuse. Second, in an audit the policy is the evidence that your controls are designed on purpose rather than improvised — and that employees were told what the rules are.

How the timesheet connects to the rest of your books

Timekeeping is not a standalone chore; it is the front end of your entire cost structure. The hours on the timesheet drive the labor distribution — the allocation of each employee's pay across the contracts and indirect categories they charged. That distribution is what makes recording payroll in a contract environment more than cutting checks: the dollars have to follow the hours into the right direct and indirect accounts. From there, direct labor lands on the contract in your job-costing records, indirect labor feeds the overhead and G&A pools, and the whole thing rolls up into the rates you bill with provisional rates all year and reconcile in your incurred cost submission at year-end.

That chain is also why timekeeping is a core piece of the broader accounting-system adequacy question. A system cannot "accumulate labor cost by contract and cost objective" — one of the things an adequacy review checks — if the labor data going in is unreliable. Get the timesheet wrong and everything downstream inherits the error.

Why it is worth the discipline

It is tempting for a small contractor to treat timekeeping casually — everyone knows what they worked on, it is a five-person shop, why the ceremony? Here is why the ceremony pays off:

• Labor is where you are most likely to get a finding. Because it is the most scrutinized cost and the hardest to prove after the fact, sloppy timekeeping is the highest-probability failure point in the entire system. Tightening it is the best return on effort you have.
• Mischarging is serious, not merely sloppy. Charging hours to the wrong contract — especially moving time off an overrunning contract onto one with budget left — is labor mischarging, and it is treated as a grave matter, not a bookkeeping slip. A clean daily process is your protection against it happening by accident.
• Your rates are only as honest as your labor base. Total time accounting is what makes your indirect rates defensible. Incomplete labor data quietly distorts every rate you bill.
• It scales with you. Build the daily habit while you are small and it simply grows with the company. Try to bolt it on the week before your first floor check and you will fail the floor check.

The whole thing reduces to a few sentences: record every worked hour, the day it happens, by the person who worked it, to a charge code they are authorized to use, and fix mistakes without erasing them. Put that in a written policy, have supervisors approve it, and the timesheet stops being your riskiest document and becomes one of your most defensible ones.

This article is general educational information about government-contract labor accounting and timekeeping practices, and is not compliance, legal, or contracting advice for your specific situation. The requirements applied to your business are judged by auditors against detailed criteria — consult a qualified contract accountant or CPA before relying on any interpretation here.