Introduction

We are entering a new and dangerous area in contractor relationships with DCAA. A world where the standing orders that guided many of DCAA’s action over the last several decades are now replaced with vague, simple, contradictory guidance that leave contractors vulnerable to whatever conclusions DCAA may wish to draw about a contractor’s business systems (to include the accounting system), operations, and costs.

A clever DCAA auditor a few years ago had obviously researched me and read many of my articles before we started an incurred cost proposal audit. During the entrance conference she turned to me and remarked that we all knew that DCAA’s Contract Audit Manual (CAM) was guidance and not law or regulation.

“Guidance for the contractor, but these are your standing orders and I expect you will follow them”, was my reply.

Now most of those orders are gone. Specific, if lousy and inaccurate, guidance on such subjects as timekeeping that ran for pages are now replaced with a directive to ensure the contractor has a compliant timekeeping system.

Contractors are now vulnerable to various DCAA auditors’ interpretation of just what is adequate.

Contractors are now subject to guidance that is conflicting. Many parts of the new CAM contradict each other.

Contractors are now at the mercy of the ‘freedom’ DCAA now offers. “Just explain it to us, we do not need it in writing. The problems we had going back to our supervisors and explaining what you had written are an illusion. I am sure nothing will get lost in translation or misinterpreted from our notes”.

A World Without the CAM

Chapters 5 and 7 of DCAA’s Contract Audit Manual (CAM) are the sections of the CAM critical to contractors of all size. Chapter 7, formerly titled “Selected Areas of Cost” disappeared from the CAM several years ago to be replaced by the still incomplete Selected Area of Cost Guidebook: FAR 31.205 Cost Principles.

Chapter 5, historically titled “Audit of Policies, Procedures, and Internal Controls Relative to Accounting and Management Systems” disappeared in the last quarter of 2018 with a three-page placeholder announcing great things to come.

We knew it would show up some day. A year and one-half after they withdrew Chapter 5 of the Contract Audit Manual (CAM) from the public, the new version is out and available on DCAA’s website. It is now titled “Audit of Contractor Compliance with Defense Federal Acquisition Requlation for Contractor Business Systems and Subsystems”.

The misspelling of the word regulation in the title is DCAA’s and is the harbinger of what follows.

Two hundred and sixteen (216) pages reduced to forty (40). Although I was not surprised, other employees of DCAA apparently were. New sections of the CAM and new audit programs make specific reference to sections of Chapter 5 that no longer exist and even no longer addressed subject matter (Estimating is an excellent example).

Misspellings, missing referenced material, and thousands of words of guidance disappears. Anyone else a little uncomfortable?

It is important to remember that the CAM was and always is guidance not regulation (no matter how you spell it). Yet, this guidance, no matter how flawed and outdated, provided a critical resource to both auditors and contractors on how to make the government happy with your accounting system.

And as much as DCAA seems to imply that reduction means a happy day for all, what it really means that there is NO GUIDANCE. No starting point for a discussion of what is an adequate or inadequate system.

Take timekeeping as an example. I always criticized the old guidance, some 400 words replicated below as inadequate. You might remember me accusing a DCAA supervisor of requiring a contractor to include a written policy that required the employee not to use white out on the computer screen to change their timesheet.

Well, I got new guidance, where I was looking for 600 words or more to cover electronic timesheets, we now have 60 words:

“DFARS Criteria (9), requires the contractor’s timekeeping system (paper or electronic) to record employee labor hours by cost objectives (e.g., project number, contract number or name, or other direct or indirect identifiers), to have traceable direct labor hours to applicable work authorization documents, and have timesheets (paper or electronic) certified by employees for the hours recorded and approved by supervisors.” (full section replicated below).

 To add insult to injury, what little they provided is NOT found in the regulation (“approved by supervisors” – how approves the CEO’s timesheet?)

How is a contractor to decide what is necessary to meet the regulation requirements or the DCAA guidance? Worse, how is the AUDITOR going to figure it out? 

Do we still:

• Need the employee to fill out timesheets daily (a huge DCAA compliance issue in the past)?
• Proper authorization, policies and procedures for what can be charged?
• Timesheets in the possession of the employee during the work period?

Most of the auditors, like the DCAA employee’s writing the new published audit programs, are going to rely on the old guidance, no longer available to contractors. Some are going to figure out what they think the requirements are all on their own.

Let me repeat that, some of the auditors are going to figure out how a contractor should operate all on their own without any guidance to assist them. If they decide that individual timesheets should be uniquely numbered, they will. If they decide that the CEO’s timesheets are unallowable because there is no supervisor to approve them, they will. Remember these people historically demanded copies of driver licenses, social security cards, and other sensitive unnecessary data to document audit ‘objectives’.

The standard for most contractor compliance issues is now “reasonable and prudent” if there is no clear statute or regulation. Sometimes it is still DCAA’s definition of reasonable and prudent even if there is a statute and regulation (see the aforementioned requirement for a supervisor signature not a countersigned review signature). Yes, where possible, a supervisor should sign.

This is like the old joke about the ultimate tax simplification – Send in all of your money to the government and the government will let you know about your refund.

How do contractors protect themselves from the new “freedom” DCAA is offering?

Simple, they do not fall into the trap. Now more then ever contractors need written policies and procedures that make it difficult for DCAA to argue against. Policies and Procedures that follow GAAP, Policies and Procedures that build off of historical excellent compliant practices. Policies and Procedures that provide a foundation to protect contracts from Auditor fantasies.

New CAM on Timekeeping and Labor Distribution

5-300 Section 3 – Audit of Contractor Compliance with DFARS

252.242-7006, Accounting System Administration

5-305 Scope of Audit

Accounting Framework

Organizational Structure

(9) A timekeeping system that identifies employees’ labor by intermediate or final cost objectives and

(10) A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;

DFARS criteria (9) and (10) are interconnected. Unlike other costs, labor is not supported by external documentation such as an invoice, purchase order or receipt. Responsibility for accuracy is maintained throughout the contractor’s organization. The risk associated with the accurate recording, distribution, and payment of labor may be significant. DFARS Criteria (9), requires the contractor’s timekeeping system (paper or electronic) to record employee labor hours by cost objectives (e.g., project number, contract number or name, or other direct or indirect identifiers), to have traceable direct labor hours to applicable work authorization documents, and have timesheets (paper or electronic) certified by employees for the hours recorded and approved by supervisors.

Additionally, DFARS criteria (10), the contractor’s labor distribution system should accurately document the employee labor hours (from timesheets) and dollars (from payroll records) by employee, by project name or job code and indirect accounts. The labor distribution records should be reconcilable to the cost accumulation records (e.g., job cost ledgers or equivalent for direct labor and the general ledger for indirect labor).

Old Cam on Timekeeping and Labor Distribution

5-909 Evaluation of Timekeeping

The contractor should have procedures to assure that labor hours are accurately recorded and that any corrections to timekeeping records are documented, including appropriate authorizations and approvals. When evaluating the contractor’s timekeeping procedures, the auditor should consider whether the procedures are adequate to maintain the integrity of the Timekeeping System.

5-909.1 Manual Timekeeping Systems

Procedures for manual Timekeeping Systems should provide for the accurate and complete recording of labor hours, as well as appropriate controls to ensure corrections to labor records are accurate and authorized. Generally, they may be categorized as procedures that pertain to:

a. Supervisory observation of employee arrival and departure to prevent improper clockin/clock-out.

b. Employee possession of timecard/timesheet.

c. Employees prepare their timecards in ink, as work is performed.

d. Only one card/sheet is prepared per employee per period; cards/sheets are preprinted with employee name and identification number; and cards/sheets are turned in to the designated timekeeping office or collected by an authorized person.

e. Precoded data is printed on the job cards for identification purposes.

f. Direct labor employees record their time no less often than daily. Sufficient formal subsidiary records are maintained, if necessary, to assure accurate time recording and allocating of labor costs to intermediate and final cost objectives when multiple jobs are worked in a day.

g. Corrections are made in ink, initialed by the employee, properly authorized, and provide a sufficient and relevant explanation for the correction.

h. Employees and supervisors sign the timecards/timesheets in accordance with procedures, verifying the accuracy of the recorded effort.

5-909.2 Automated Timekeeping Systems

Procedures for automated Timekeeping Systems should provide for the accurate and current recording (e.g., no less than daily) of labor hours by authorized employees, as well as appropriate controls to ensure corrections to labor charges are accurate and authorized. Generally, they may be categorized as procedures that pertain to:

a. Only the employee uses their labor charging instrument to access the labor system.

b. Employee badge issuance is sufficiently controlled so that no number is duplicated and badges are not issued to unauthorized persons.

c. Procedures are in place which require the employee to report lost badges promptly.

d. Changes are initialed, authorized, and dated by the employee and supervisor and include a description of the reason for the change. This may be done electronically.

e. A verifiable audit trail process is in place that collects all initial entries and subsequent changes.

5-910 Evaluation of Labor Distribution

The contractor should have policies to reasonably assure the proper recording of labor costs to cost objectives. These policies should address the reconciliation of labor hours between labor distribution summaries and Timekeeping/Payroll Systems, recording of both compensated and uncompensated hours worked, and maintenance of an audit trail.

5-910.1 Reconciliations

The contractor should have procedures which require that the total labor hours reflected in labor distribution summaries agrees with the total labor charges as entered into the Timekeeping and Payroll Systems. This reconciliation attests that the labor charges to contracts represent actual paid or accrued costs and that such costs are appropriately recorded in the accounting records. Each employee’s time charge should be distributed as recorded.

5-910.2 Recording Hours Worked

The contractor should have procedures to ensure that all hours worked are recorded, whether they are paid or not, to assure the proper distribution of labor costs. This is necessary because labor rates and labor overhead costs can be affected by total hours worked, not just paid hours worked (also see 6-410).

5-910.3 Audit Trail

The contractor should have procedures that require the generation of an audit trail which documents distribution of direct and indirect labor charges to the appropriate cost objectives (e.g., a labor distribution report.). When evaluating the contractor’s procedures, the auditor should consider whether direct and indirect labor charges are supported by sufficient evidential matter to verify the allocability to final cost objectives, and that they are traceable to time cards and approved work authorizations.