Federal Contract Timekeeping: A Setup Guide for First-Time Contractors

You won the contract. Somewhere in the paperwork there is a mention of an accounting system, and possibly the letters DCAA, and you are now wondering how much trouble you are in.

Probably none, yet. But the rules about how you track your team’s time did change the day you signed, and it is much cheaper to deal with that now than to reconstruct it later. The processes that have worked fine for your commercial clients do not automatically satisfy a federal contract, and that catches most people out.

Here is the good news up front. Almost all of this is setup you do once. You decide how the work gets categorized, you tell your team how to record their hours, and after that your timekeeping system does the repetitive part. You do not need to become an expert in federal cost accounting. You need to know what your system should be doing, and roughly why.

What actually changed when you signed?

Sarah is an engineer. On Tuesday she worked eight hours: most of the day on the new federal contract, an hour of admin, and a couple of hours helping with a proposal.

Your old timesheet recorded eight hours. Here is what it needs to say now:

That is the change, and it took Sarah about fifteen seconds. Before the contract, your time tracking answered one question: what do we bill the client? Now it has to answer a second one. Where did all the hours go, including the ones nobody bills?

The part people find counterintuitive is the bottom two rows, the three hours nobody bills. Why would the government care about those?

Because your overhead rate is calculated from exactly those hours. Guess at them, or leave them out, and every rate built on top of them is wrong, including the ones on your invoices. “Sarah, 8 hours” tells an auditor nothing. The version above answers almost everything they will ask.

Which rules apply to you?

This depends on how you get paid, not on how big the contract is. Find the contract type on your award, then read across.

There are other variants, and incentive contracts and anything paid by progress payments land in the same bracket as the bottom two rows. If yours is not obviously one of the three above, the contract type is named on the award document and it is worth being certain which one you have.

If you are on the first row, the strictest rules may not reach you yet. Worth reading anyway, because they arrive with your next award of a different type, and by then you will want the records to already exist.

If you are on either of the other two, the contract almost certainly includes a clause about your accounting system. It sets out eighteen things the system should do. Two of them are about time:

“Cost objective” is the only bit of jargon worth learning, and it means something simple: the thing an hour belongs to. A contract is one. So is “general admin”. The two sentences above are asking for a system where every hour is attached to one of them, and where the billable and non-billable work stay separate.

That is a description of software, and it is a solved problem. What you have to decide is the categories. What the system does with them afterward is not your job.

One thing worth knowing if you are on a cost-reimbursement contract: someone has probably already checked this. FAR 16.301-3(a)(3) only lets a contracting officer award one when they have decided your accounting system can handle it. That review happens on a form called the SF 1408, and two of its items use exactly the same words as the clause above. The bar before the award and the bar after it are the same bar.

What to set up in your first month

Five things, and none of them take long. The order matters more than the speed.

1. Read the parts of the contract nobody reads

   You already know what you have to deliver. The statement of work is the part everyone reads. Go back for the rest of it with five questions in hand:

   How do you invoice, and how often? Are specific job titles or labor categories named? Are there separate contract line items, sometimes called CLINs, that have to be reported on individually? Which FAR and DFARS clauses have been written into the contract? And are your costs reimbursable, or are you working to a fixed price?

   This does not need a lawyer for a first contract. It needs someone to read the whole document once with those questions in front of them, and write the answers down where both finance and delivery can see them.

2. Add the contract as its own project

   Its own line, not a folder under the client. Anything you will have to report on separately needs to be its own task underneath it.

3. Create your direct and indirect categories

   This is the one piece of accounting vocabulary worth getting straight now. Direct work can be pointed at one contract: Sarah’s five hours. Indirect work supports several contracts or the business as a whole, so it cannot be pinned to any single one.

   Your indirect categories will usually be some of: administration, management, business development, IT, training and paid time off. These are where the other three hours go.

   Keep the list short. Five or six categories your team understands beats twenty nobody can choose between. Later on, these categories are what your indirect rates get calculated from, which is why deciding them once and leaving them alone matters.

4. Say who can charge the contract, and who approves it

   Approval usually goes to whoever knows the work happened. On bigger contracts it goes to them first and then to finance, who check it was charged to the right place.

5. Tell your team, in one short email

   What to charge, when to enter it, and what to do when they get it wrong. This is the step people skip, and it is the one an auditor tests directly by asking your staff.

The rules your team needs to follow

DCAA publishes a guide for contractors that spells out what it expects. Most of it describes what good software does automatically. These six are the ones your people have to actually do, and they are what belongs in your written timekeeping policy.

• Enter time daily. Not Friday afternoon from memory. Someone reconstructing a week is guessing, and it shows
• Everyone fills in their own. A manager should not be completing someone’s timesheet, unless that person is off sick or on leave for a while, and even then they redo it when they return
• Record all the hours worked, paid or not. If your salaried staff work fifty hours, the record says fifty. Unpaid extra hours are called uncompensated overtime, and there is a whole clause about disclosing them, FAR 52.237-10
• Corrections keep the old version. When someone charged the wrong project, the fix should show what it was, what it became, and that the employee agreed. Any decent system does this without being asked
• The work decides the category, not what has budget left. This is the one that gets people in real trouble
• Have an answer for when someone forgets. People go on leave, get sick, and lose a Friday. Decide in advance who chases it, how late entry gets recorded, and who signs it off, so the fix is a routine rather than a scramble

There is one more that is about you rather than your team. Whoever enters or approves time should not be the same person running payroll, and the manager who owns the contract’s budget should not be the one entering hours against it. In a small company that can feel like bureaucracy for its own sake. It exists because the alternative puts someone under pressure to make the numbers work.

Where the timesheet goes after it is approved

A timesheet is not the end of anything. It is the start of a chain, and the value of getting the entry right is that everything downstream inherits it.

The failure worth avoiding is a timesheet that stops at stage two. When approved time sits in one system and somebody retypes it into another at month end, two things go wrong. Small transcription errors creep in, and the trail breaks: the number on the invoice is no longer the number anyone approved.

That is the practical argument for connecting your timekeeping to whatever you use for accounting rather than exporting and re-entering. TimeRewards syncs approved time and expenses into QuickBooks on every plan, and into Sage Intacct on Professional and above. Approval is the gate in both cases, so nothing unapproved moves.

You do not have to solve this in week one. But it is worth knowing the chain exists while you are setting up your categories, because categories that make sense in your timekeeping and nowhere else are the ones that cause work later.

The thing people are most surprised by

At some point an auditor may turn up unannounced and talk to your staff. It is called a floorcheck. They walk around, ask people what they are working on, and compare the answers to what those people charged.

They are checking three things: that the person is actually there, that they are doing the job they are booked as doing, and that their hours went to the right place.

This only applies to some contracts. If you bill by the hour, or get your costs reimbursed, you are in scope. Fixed-price work generally is not.

It sounds alarming and mostly is not. The people who struggle are the ones whose staff have never been told how any of this works, which is why the one-email step above matters more than it looks. If your team enters their own time as they go and knows what the categories mean, a floorcheck is a short conversation.

Remote staff are covered too. The auditor talks to the manager, then phones the employee. If you have people working from home, you need a short written policy saying how it is approved, what they are working on, and that they submit time through the same system as everyone else.

Common questions

Most contractors find the first award is the hard one. You are learning the vocabulary and building the habits at the same time as delivering the actual work. By the second, the categories exist, your team knows the routine, and the compliance side is mostly something running in the background. If you want to see what other government contractors set up, or read more on DCAA compliance requirements, both go a level deeper than this. There is also a glossary for the terminology and a time card calculator if you are still adding up split days by hand.

This article explains published federal acquisition and audit guidance in plain terms, with the sources linked. It is not legal or accounting advice. What applies to your contract depends on its terms and clauses, and your contracting officer and accountant are the people to confirm it with.