For government contracts, compliance with the Federal Acquisition Regulations and the Defense Contract Audit Agency (DCAA)’s enforcement is a constant challenge. One area government contractors must have under their belt is the allocation of job costs. Federal Acquisition Regulations (FAR), FAR 31.201-4 requires all costs to be allocable. What does that mean for the day-to-day bookkeeping? This means every small step from time-cards, vendor bills, to invoicing the government matters. Government contractors must not only know how to properly enter transactions into their accounting program, but know how to check their own books for DCAA compliance. Two sets of report comparisons which can be useful for finding errors are timesheet history versus labor distribution reports and the profit and loss by job costs versus trial balance reports.

Timesheet History vs Labor Distribution:

Timekeeping itself is a critical area. For more detailed information for the timekeeping requirements per FAR see my DCAA Compliant Timekeeping blog. Once time has been entered, billed, and employees paid; it is imported to verify the direct labor costs have been allocated to customer jobs and contract line items (aka labor categories or deliverables). The direct labor hours recorded on the timesheets should equal the hours distributed. If the timesheet total direct labor hours do not match the total direct labor hours distributed there is an error in the record keeping.

Profit and Loss by Job vs Trial Balance:

There are more direct costs than just direct labor. This is where the profit and loss by job report comes in. This report breaks down the direct costs which have been allocated to each job. The total column for this report should equal the account balances from the trial balance report for the corresponding general ledger accounts. If there are variances other than reversing accrual entries, costs have not been properly allocated. The most common error found here are costs recorded in the direct labor account that have not been allocated to a job.

Another type of error the profit and loss by job versus the trial balance can bring to light is indirect costs allocated to jobs. Only direct costs should be recorded to a customer job, so if an indirect cost; such as a G&A expense, is allocated to a job then either the cost has been allocated in error to a job or the cost has been recorded in the wrong general ledger account.

In order to stay on top of the job allocation, these two reports should be reviewed on a monthly basis. Early detection is the most efficient way to correct errors. The DCAA audit manual also states, books must be in compliance with Generally Accepted Accounting Principles (GAAP). Make sure any changes made to cost allocation do not violate this requirement. Any issues or questions should be brought to your CPA right away. As always do not forget documentation should be “complete, accurate, and readily available for examination to support claimed/billed costs.”


Contributed by Jamie M. Shryock, CPA, Client Advisor