FAR Timekeeping Requirements for Government Contractors

The FAR timekeeping requirements for government contractors come down to a single principle: every labor hour billed to a federal contract must be traceable to a specific employee, a specific day, and a specific cost objective, with documentation an auditor can follow from timesheet to invoice. The rules live mainly in the Federal Acquisition Regulation Part 31, the accounting system criteria at DFARS 252.242-7006, and the Defense Contract Audit Agency’s guidance for contractors. Meeting them requires daily time entry, dual certification by employee and supervisor, disciplined charge coding, consistent classification of direct and indirect labor, and records you can produce years after the work is done.

What an Acceptable Accounting System Must Do

DFARS 252.242-7006 sets the benchmark. An acceptable system must give reasonable assurance that applicable laws are followed, cost data is reliable, misallocations are minimized, and contract charges align with billing procedures.¹ Four elements matter most for labor:

Internal controls, meaning a sound control environment and accounting framework backed by management reviews or internal audits that verify compliance with your own written policies.
A timekeeping system that identifies each employee’s labor by intermediate or final cost objective.
A labor distribution mechanism that charges both direct and indirect labor to the correct cost objectives.
Proper segregation of direct costs from indirect costs, and where applicable, preproduction from production costs.

Segregation of duties runs through all of this. The people recording time should not be the same people processing payroll or approving charges. Written policies must spell out how time is recorded, approved, and transferred to the general ledger. Contractors without those documented procedures routinely fail their first DCAA accounting system audit.¹

How Employees Must Record Their Time

Daily entry is non-negotiable. DCAA expects employees to record hours contemporaneously, on the same day the work is performed. Filling out timesheets days or weeks after the fact is one of the most common audit findings. Estimating time by percentage across tasks is not acceptable because it produces no verifiable evidence of how time was actually spent.

Each entry must reference a specific charge code tied to a contract or an internal indirect account. That charge code is what links an employee’s labor to a final cost objective inside the accounting system. Without it, auditors cannot trace hours on an invoice back to real work.

Every timesheet needs two signatures. The employee certifies that the hours are accurate and coded correctly. A supervisor with knowledge of the work then reviews and countersigns.² A supervisor who rubber-stamps timesheets without reviewing the work defeats the control, and auditors will flag it.

Electronic Timekeeping

Most contractors use electronic systems, and DCAA holds them to the same substantive standards as paper: daily recording, employee certification, and supervisor approval. Two extras apply. Each employee needs a unique login so entries can be attributed to a specific person, and the system must maintain a change log showing who altered any entry and when.² A system that lets a supervisor overwrite an employee’s timesheet without generating an audit trail is a serious control weakness.

Corrections

Mistakes happen. When they do, the correction must document three things: the original charge, the corrected charge, and written concurrence from the employee agreeing to the change.² Supervisors should not complete an employee’s timesheet unless that employee is on prolonged authorized leave, and even then the employee must submit a replacement timesheet on return. A pattern of supervisors filling in or altering employee records without documentation reads to auditors as a systemic control failure.

Direct Labor, Indirect Labor, and the Consistency Rule

FAR Part 2 defines a direct cost as any cost identified specifically with a particular final cost objective, such as a single contract or project.³ Four hours an engineer spends writing code exclusively for Contract A are a direct charge to Contract A. An indirect cost benefits two or more cost objectives or cannot be traced to a single one. Administrative overhead, human resources, and general management are typical examples.

The consistency rule at FAR 31.202 is where contractors most frequently stumble. You cannot charge a cost directly to one contract if similar costs incurred for the same purpose have been included in an indirect pool allocated to that or any other contract.⁴ Charging IT support directly on one contract while also carrying IT support in an overhead pool allocated across all contracts is double-counting, and DCAA auditors are trained to find it.

Indirect costs must be accumulated into logical pools and allocated using a base common to all cost objectives receiving the allocation. FAR 31.203 favors practical methods over unnecessary complexity when simpler approaches produce substantially the same result.⁴ A cost is allocable to a government contract if it was incurred specifically for that contract, if it benefits both the contract and other work and can be distributed proportionally, or if it is necessary to the overall operation of the business.⁵ Misclassifying an indirect cost as a direct charge inflates the billed amount on one contract and generates a finding that can ripple across your whole cost structure.

Uncompensated Overtime and Paid Absences

Uncompensated overtime is time worked beyond 40 hours per week by salaried employees who are exempt from the Fair Labor Standards Act and receive no additional pay for those extra hours. As of 2026, the salary threshold for FLSA exemption is $684 per week.⁶

FAR 52.237-10 requires contractors to account for uncompensated overtime in service contract proposals so hourly rates are not inflated. The calculation: multiply the standard hourly rate by 40, then divide by total proposed hours per week including unpaid overtime. Someone normally paid $20 per hour and expected to work 45 hours per week bills at an adjusted $17.78 ($20 × 40 ÷ 45).⁷ Skipping the adjustment means the government pays more per hour than the labor actually costs.

Paid absences such as holidays, vacation, and sick leave are fringe benefits under FAR 31.205-6(m), allowable when reasonable and consistent with the contractor’s established policy.⁸ They accumulate as indirect expenses unless a contract explicitly permits direct charging. For uncompensated overtime calculations, paid absences count as part of the normal work week rather than as overtime hours.⁷

Subcontractors Do Not Break the Chain

Prime contractors cannot push timekeeping risk to subcontractors and walk away. FAR Part 44 requires government consent before awarding certain subcontracts on cost-reimbursement, time-and-materials, and labor-hour contracts, especially when the prime lacks an approved purchasing system.⁹ Contractor Purchasing System Reviews evaluate compliance with cost accounting standards in subcontract awards, and recurring noncompliance can result in purchasing system approval being withheld or withdrawn. In practical terms, primes should require their subcontractors to maintain timekeeping systems that meet the same DCAA standards. If a subcontractor’s sloppy records lead to unallowable costs, the prime absorbs the financial hit.

What DCAA Actually Checks

The floor check is DCAA’s most direct test. An auditor arrives at your facility, often unannounced, and interviews employees at their workstations. They ask what the employee is working on right now, which charge code applies, and whether that matches the timesheet. A discrepancy becomes a finding.

Employees need to explain the system under questioning. They should know how to record daily time, what their current charge codes are, how to request a correction, and who approves their timesheets. An employee who cannot answer these basic questions signals weak training, and auditors treat that as a system-level deficiency rather than an individual lapse.

Beyond floor checks, DCAA conducts labor system audits that review your written policies, test transactions against them, and reconcile timesheet data with payroll records and contract invoices. Time-and-materials contracts get extra scrutiny because the government pays based on direct labor hours at fixed rates, giving contractors little built-in incentive for efficiency. FAR 16.601 requires government surveillance on those contracts to ensure cost controls exist.¹⁰

Record Retention

FAR 4.703 sets the baseline: records stay available for three years after final payment on the contract.¹¹ Records include accounting data and time records regardless of format. FAR 4.705 through 4.705-3 set category-specific windows for payroll records and time-and-attendance cards that may differ from the three-year baseline, and any longer period in a contract clause controls. Records kept past the required period for your own purposes remain accessible to the government for the full duration you keep them.

Electronic imaging of paper records is allowed if the images accurately reproduce originals, including signatures, and if the system is reliable, secure, and indexed for quick retrieval.¹² After imaging, keep the paper originals for at least one year to validate the imaging system. Data on computer media must remain on reliable storage for the full retention period, cannot be destroyed or overwritten early, and any transfer between systems needs its own audit trail.

What Noncompliance Costs

The mildest outcome is cost disallowance: DCAA refuses to reimburse the improperly supported labor, and the contractor absorbs it. Fines and penalties from regulatory violations are themselves unallowable under the cost principles, so those cannot be passed through either.¹³

Deliberate mischarging crosses into False Claims Act territory. Under 31 U.S.C. § 3729, anyone who knowingly submits a false claim for payment faces a civil penalty per false claim plus three times the government’s damages.¹⁴ The base statutory range of $5,000 to $10,000 per claim is adjusted annually for inflation and now sits well above those numbers. Damages can drop to double instead of triple if the contractor self-reports within 30 days of discovery, cooperates fully, and reports before any investigation has begun. The Act also lets whistleblowers file qui tam suits and collect between 15% and 30% of the recovery, which means an employee who sees mischarging has a direct financial reason to report it.¹⁵ Systematic mischarging across dozens of invoices compounds fast.

1
eCFR. 48 CFR 252.242-7006 – Accounting System Administration
2
DCAA. DCAAM 7641.90 – Information for Contractors
3
Acquisition.GOV. Part 2 – Definitions of Words and Terms
4
Acquisition.GOV. Part 31 – Contract Cost Principles and Procedures
5
eCFR. 48 CFR 31.201-4 – Determining Allocability
6
U.S. Department of Labor. FLSA2026-1 Opinion Letter
7
Acquisition.GOV. 52.237-10 Identification of Uncompensated Overtime
8
Acquisition.GOV. 31.205-6 Compensation for Personal Services
9
Acquisition.GOV. Part 44 – Subcontracting Policies and Procedures
10
Acquisition.GOV. 16.601 Time-and-Materials Contracts
11
eCFR. 48 CFR 4.703 – Policy
12
Acquisition.GOV. Subpart 4.7 – Contractor Records Retention
13
DCAA. Chapter 27 – Fines Penalties Mischarging Costs
14
Office of the Law Revision Counsel. 31 U.S. Code 3729 – False Claims
15
United States Department of Justice. False Claims Act Settlements and Judgments Exceed $6.8B in Fiscal Year 2025