Labor recording is the basis for the valuing and allocating the efforts of you and your employees. It is a critical process for government contractors who depend on it for their product and services costing (read billing/cash flow) and pricing.
Unlike other cost items labor is not supported by external, independent or third-party documentation such as an invoice, purchase order or receipt. Contractor personnel have complete control over the initiation and documentation of the support for the incurrence and distribution of these costs. For that reason, there must be a strong emphasis on internal control to ensure the integrity of these costs whether you are recording efforts manually or through an automated system.
Mirroring DCAA’s performance of an audit of your labor processes you should establish internal controls that:
- Ensure the existence of all employees recording labor hours and receiving a corresponding paycheck. This may seem unnecessary when you have only a few employees, but when you have fifty employees or more it becomes a needed reality.
- Verifies that the work performed by your employees actually conforms to the account or charge number utilized by the employee and that they a properly authorized to charge that account/project number.
- Ensures the account or charge numbers utilized correspond to the detail proposed for the contractual effort involved in complying with the requirement of CAS 401, Consistency in Estimating, Accounting and Reporting Costs, and FAR 31.201-1, Composition of Total Cost, which require a contractor to estimate costs consistent with the practices used in accumulating actual costs and conversely to record actual costs consistent with how they are estimated.
- Require the timely input of all labor hour efforts, either manually or electronically, and their accurate recording into the labor reporting processes.
- Verifies the accuracy of the conversion of labor hour efforts to labor dollar amounts utilizing the effective rate per hour calculated based on total-time-accounting as required by FAR 52.237-10, Identification of Uncompensated Overtime.
- Reconcile total labor dollars recorded, both direct and indirect, by employee to amounts recorded as payroll for the given period.
- Ensure the accurate recording of the labor dollar values calculated to the appropriate direct or indirect charge numbers and accounts in the Job Cost Ledger and the associated General Ledger accounts. Amounts recorded must also be verified against those amounts billed.
It is extremely important that all employees, at all levels in the organization, are aware of the requirements and importance of proper labor recording and reporting and the consequences of labor mischarging. A training program needs to be developed and continually maintained making all personnel involved directly or indirectly in the performance of government contracts and subcontracts aware of the requirement for timely and accurate labor recording and the penalties, internal and by the government, associated with knowingly mischarging, omitting or falsifying any labor records and their personal responsibilities associated with the accuracy and integrity of their labor recording practices. Employee participation in this training program should be documented, along with their understanding of the requirements, and retained for future compliance verification.