The costs of labor, especially in service-oriented companies is the most sensitive area of incurred cost that the Defense Contract Audit Agency (DCAA) is required to audit. Unlike other cost items charged to the Government, labor is not supported by third party documentation such as invoices, purchase orders or receipts.
Recent surveys indicate that labor and timekeeping is the second top audit issue just behind the audit of indirect rates. Updated audit programs recently released by the DCAA emphasize the audit processes now in place and being implemented relative to the performance of labor floor checks and interviews.
The objective of floor checks performed by DCAA is to verify the existence of employees and to evaluate the timekeeping internal control procedures. Performed un-announced the floor check is to:
- Assess compliance with the established timekeeping internal control and procedures,
- Establish the reliability of an employee’s time records,
- Verify that the employee is actually at work (both on and off-site),
- Ensure that the employee is performing in his/her assigned job classification, and
- Determine that the employee’s time is charged to the proper cost objectives.
Observations during the floor check will be verified through the accounting records. You, as a contractor, should provide a representative throughout the entire floor check process to facilitate the audit and ensure DCAA’s understanding of the data obtained.
Labor interviews are to evaluate the accuracy of salaried and/or hourly labor hour charges to contracts, indirect accounts or other cost objectives, the employees understanding of the labor recording internal control process and to assess the risk of labor mischarging.
To be prepared a contractor should assess its internal control policies and procedures for compliance and employee understanding and perform floor checks of randomly selected employees. If problems are identified, appropriate corrective actions should be taken immediately.