Understanding Labor Charging: How Contractors Can Safeguard Against Inaccuracies in Government Contracts

Labor charging is a critical element of government contracts. Labor typically represents a significant cost component in contracts, making it essential for contractors to accurately account for the number of hours worked and tasks completed. However, the practice of timekeeping can easily be manipulated and fraudulently charged, leading to significant inaccuracies for both contractors and government agencies. Contractors can avoid these inaccuracies by understanding requirements and adopting best practices for labor charging.   

Requirements 

Government contracts often contain labor charging requirements that, while complex and complicated, promote accountability and transparency. The most crucial set of requirements for contractors is the Federal Acquisition Regulation (FAR) 31.201-2(d), which states: 

A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of an inadequately supported claimed cost. (emphasis added) 

Contracting officers have disallowed labor costs for contractors who did not adhere to this requirement; i.e., they failed to maintain adequate records demonstrating that the costs they claimed were valid, related to the contract, and complied with cost rules. For example, the labor cost must be traceable to the statement of work and invoice. If the records are not sufficient or explicit, the contracting officer can reject some or all claimed costs. Rejection of invoices equates to an impact on contractor financial performance and cash flow. 

Contractors must also pay careful attention to the specific requirements outlined in their contracts. Some contracts contain provisions that require contractors to maintain a higher level of detail and documentation for direct labor charges on the contract or task order. For example, a governmental agency may express concern and question hours it views as unproductive. To rebuke this, the contractor must highlight their consistent timekeeping, reporting, and invoicing practices to prove that these hours were, in fact, allowable, allocable, and reasonable. Failure to meet these specific contract requirements can result in delays in current projects or loss of future government contract opportunities. 

Best Practices 

To comply with all applicable requirements and regulations and ensure that labor accurately reflects the work performed, contractors must implement timekeeping best practices. These practices include maintaining a compliant, reliable cost-accounting system, ensuring employees accurately record all hours worked to the proper charge code, and implementing proper controls for reviewing and approving timesheets. Additional best practices include: 

• using an electronic time recording system 

• consistency with proposing, recording, and billing of hours 

• using work authorizations 

• implementing salary rate limitations from applicable agencies 

• following the FAR and all applicable labor laws 

• maintaining records and supporting documentation for recorded hours for required record-retention periods 

How BRG Can Help 

BRG Government Contracts experts can help contractors establish timekeeping practices and mitigate timekeeping issues with various steps. Contractors must stay informed of changes in the regulatory environment to ensure continuous compliance and mitigate audit risk and questioned costs. BRG experts offer insights to navigate the complex federal regulatory landscape. Our team can perform compliance assessments, advise on indirect rate structures and calculations, conduct business system reviews, perform mock audits, implement remediation activities, and guide contractors through the unique government contracting regulatory environment.