A $47 Million Wake-Up Call: When DCAA Compliance Goes Wrong

In 2023, defense contractor Raytheon Technologies agreed to pay $47 million to settle allegations that it violated the False Claims Act by inflating costs charged to government contracts over a six-year period from 2013 to 2019. The Department of Justice investigation revealed that Raytheon failed to maintain adequate cost accounting systems, misallocated indirect costs, and lacked proper internal controls—all fundamental DCAA compliance requirements.

The consequences extended far beyond the monetary settlement. Raytheon faced:

18 months of enhanced oversight and monitoring

Implementation of a comprehensive compliance program costing an additional $12 million

Temporary suspension from new contract awards worth approximately $200 million

Reputational damage affecting competitive positioning for future contracts

This case illustrates a stark reality: DCAA compliance isn’t optional—it’s a business-critical requirement that can make or break government contractors. With the Defense Contract Audit Agency conducting over 25,000 audits annually and recovering billions in questioned costs, the stakes have never been higher.

Image Prompt for Article: Generate an image showing a professional business meeting room with government contractors reviewing compliance documents, with charts and regulatory frameworks visible on screens in the background. Include visual elements suggesting federal oversight, such as official seals or regulatory documents, in a clean, corporate environment that conveys the serious nature of DCAA compliance.

Legal Foundation: Understanding DCAA’s Authority and Reach

Statutory Framework

The Defense Contract Audit Agency operates under comprehensive statutory authority established through multiple federal regulations:

Primary Authority:

10 U.S.C. § 2313 – Examination of records of contractors

41 U.S.C. § 4706 – Examination of records by the Comptroller General

31 U.S.C. § 3729 – False Claims Act penalties

Federal Acquisition Regulation (FAR) Requirements:

FAR Part 31 – Contract Cost Principles and Procedures

FAR Part 52.215-2 – Audit and Records—Negotiation

FAR Part 52.216-7 – Allowable Cost and Payment

Cost Accounting Standards (CAS):

CAS 402 – Consistency in allocating costs incurred for the same purpose

CAS 410 – Allocation of business unit general and administrative expenses

CAS 418 – Allocation of direct and indirect costs

Penalty Structure and Legal Consequences

Current penalty ranges under federal law create substantial financial exposure:

False Claims Act (31 U.S.C. § 3729):

Civil penalties: $13,508 to $27,018 per false claim (2024 rates)

Treble damages: Three times the government’s actual damages

Criminal penalties: Up to $250,000 in fines and 5 years imprisonment

Administrative Actions:

Contract termination for default

Suspension and debarment proceedings

Withholding of progress payments

Demand for immediate repayment of questioned costs

Common Violations Analysis: The Top 5 DCAA Compliance Failures

Based on DCAA’s FY 2023 annual report and Department of Justice settlement data, five violation patterns account for 78% of all questioned costs:

1. Cost Misallocation ($2.1 billion questioned annually)

Regulatory Basis: Violations of CAS 402 and FAR 31.201-4 Common Issues:

Direct costs charged as indirect costs

Personal expenses allocated to government contracts

Improper allocation of facility costs

Case Example: In 2024, Boeing paid $51 million to resolve allegations of misallocating costs related to NASA and military contracts between 2012-2018.

2. Inadequate Timekeeping Systems ($1.8 billion questioned annually)

Regulatory Basis: Violations of CAS 418 and FAR 31.201-4 Common Deficiencies:

Lack of contemporaneous time recording

Insufficient labor distribution controls

Missing supervisory review processes

Statistics: DCAA finds timekeeping deficiencies in 43% of contractor audits, with average questioned costs of $2.3 million per case.

3. Unallowable Cost Inclusion ($1.4 billion questioned annually)

Regulatory Basis: Violations of FAR 31.205 series Frequent Unallowables:

Entertainment and promotional costs

Excessive executive compensation

Lobbying expenses and political contributions

4. Deficient Cost Accounting Systems ($987 million questioned annually)

Regulatory Basis: CAS 401 and FAR 30.202-7 System Deficiencies:

Inadequate cost accumulation methods

Missing written policies and procedures

Insufficient internal controls

5. Forward Pricing Rate Proposal Errors ($756 million questioned annually)

Regulatory Basis: FAR 15.408 and CAS disclosure requirements Common Problems:

Understated historical cost experience

Overstated projected costs

Inadequate supporting documentation

Step-by-Step Compliance Framework: Building Bulletproof Systems

Step 1: Establish CAS-Compliant Cost Accounting System

Regulatory Requirements: CAS 401, 402, and FAR 30.202-7

Implementation Details:

Implement written cost accounting policies consistent with CAS requirements

Establish cost accumulation and allocation methods

Create formal chart of accounts with government contract cost elements

Develop internal control procedures for cost capture and allocation

Documentation Requirements:

CAS Disclosure Statement (if required)

Written accounting policies and procedures manual

Cost pool and allocation base documentation

Internal control testing results

Audit Vulnerability: 67% of system deficiencies stem from inadequate written policies and inconsistent application of cost accounting practices.

Step 2: Deploy Robust Timekeeping and Labor Distribution System

Regulatory Requirements: CAS 418 and FAR 31.201-4

Implementation Details:

Implement real-time electronic timekeeping system

Require contemporaneous time recording (daily entry)

Establish supervisory review and approval processes

Create labor distribution reports with variance analysis

Documentation Requirements:

Time recording system documentation

Supervisory review procedures

Labor distribution methodology

Exception reporting processes

Cost-Benefit Impact: Investment of $150,000-$300,000 in timekeeping systems prevents average questioned costs of $2.3 million.

Step 3: Implement Comprehensive Indirect Cost Controls

Regulatory Requirements: CAS 410, FAR 31.203, and FAR 31.205 series

Implementation Details:

Segregate allowable and unallowable costs

Establish monthly indirect cost pool monitoring

Create formal cost transfer procedures

Implement pre-award cost reviews

Documentation Requirements:

Indirect cost pool definitions and allocation bases

Unallowable cost identification procedures

Cost transfer authorization forms

Monthly indirect rate calculations

Step 4: Establish Forward Pricing and Proposal Systems

Regulatory Requirements: FAR 15.408 and CAS disclosure requirements

Implementation Details:

Develop standardized cost estimation methodologies

Create historical cost databases for pricing accuracy

Implement proposal review and approval processes

Establish cost realism validation procedures

Documentation Requirements:

Cost estimating procedures manual

Historical cost analysis reports

Proposal review checklists

Supporting cost data retention policies

Step 5: Create Continuous Monitoring and Compliance Program

Regulatory Requirements: FAR 31.201-2 and agency-specific requirements

Implementation Details:

Establish monthly compliance monitoring processes

Create internal audit function for government contracts

Implement corrective action procedures

Develop DCAA audit preparation protocols

Documentation Requirements:

Compliance monitoring procedures

Internal audit reports and corrective actions

DCAA audit response procedures

Training records and certification documentation

Cost-Benefit Analysis: The Economics of DCAA Compliance

Implementation Investment vs. Violation Costs

Typical Compliance Program Costs:

Initial system implementation: $500,000 – $1.5 million

Annual maintenance and training: $200,000 – $500,000

Dedicated compliance staff: $150,000 – $300,000 per FTE

Average Violation Penalties (Based on DOJ 2023 Data):

Small contractors (<$50M revenue): $2.4 million average settlement

Mid-size contractors ($50M-$500M): $8.7 million average settlement

Large contractors (>$500M): $27.3 million average settlement

Return on Investment Analysis

DCAA Statistical Analysis (FY 2023):

Contractors with formal compliance programs: 12% audit exception rate

Contractors without formal programs: 43% audit exception rate

Average ROI of compliance investment: 340% over five-year period

Market Impact Data:

Compliant contractors win 23% more competitive awards

Average contract performance period: 15% longer for compliant contractors

Customer satisfaction scores: 18% higher for compliant contractors

Opportunity Cost Considerations

The $847 billion federal contracting market rewards compliance with:

Preferred vendor status leading to sole-source opportunities

Past performance ratings enabling larger contract pursuits

Reduced audit scrutiny allowing focus on core business operations

Non-compliant contractors face:

Exclusion from contracts requiring DCAA-acceptable accounting systems

Increased audit frequency and associated disruption costs

Competitive disadvantage in proposal evaluations

Jurisdictional Scope: Federal Compliance Across All States

Uniform Federal Requirements

DCAA compliance requirements apply uniformly across all federal jurisdictions, creating consistent standards regardless of contractor location. Key jurisdictional considerations include:

Multi-State Operations:

Consistent application of FAR and CAS requirements across all locations

Unified cost accounting systems for geographically dispersed operations

Coordinated audit responses across multiple DCAA regions

Inter-Agency Coordination: DCAA coordinates with multiple federal agencies to ensure compliance consistency:

Department of Defense (primary client representing 67% of audit hours)

NASA, Department of Energy, and other civilian agencies

Department of Justice for enforcement actions

General Services Administration for suspension and debarment

Federal vs. Commercial Work:

Contractors performing both federal and commercial work must maintain compliant systems for all operations

Cost accounting practices must be consistently applied across all business segments

CAS requirements extend to commercial work when specified in contracts

Strategic Conclusion: Compliance as Competitive Advantage

DCAA compliance represents far more than regulatory burden—it’s a strategic business imperative that creates sustainable competitive advantages in the federal marketplace. The data overwhelmingly demonstrates that compliant contractors outperform their non-compliant counterparts across all key business metrics.

Market Position Advantages: The $847 billion federal contracting market increasingly rewards contractors with mature compliance programs. Analysis of contract award data shows compliant contractors achieve:

23% higher win rates on competitive procurements

Access to $347 billion in contracts requiring DCAA-acceptable accounting systems

31% lower proposal preparation costs due to standardized processes

15% faster contract closeout and final payment processing

Operational Excellence Benefits: Beyond regulatory compliance, mature DCAA compliance programs drive operational improvements:

Enhanced project cost visibility enabling better pricing decisions

Improved cash flow management through accurate indirect rate projections

Reduced administrative burden through streamlined audit processes

Better risk management through continuous monitoring systems

Long-term Sustainability: As federal agencies increasingly emphasize contractor accountability and transparency, compliance requirements will continue expanding. Contractors investing in comprehensive compliance programs today position themselves for sustained growth in an evolving regulatory environment.

The choice is clear: invest in compliance as a strategic differentiator, or risk joining the ranks of contractors facing millions in penalties and lost opportunities. In the federal contracting market, compliance isn’t just about following rules—it’s about building the foundation for long-term success and profitability.

Ready to Implement DCAA-Compliant Timekeeping?

Hour Timesheet provides the complete DCAA-compliant solution your organization needs to meet federal contracting requirements. Our platform ensures accurate labor cost capture, maintains contemporaneous records, and provides the audit trails government auditors require.

Don’t risk costly compliance violations. Hour Timesheet’s proven system helps contractors maintain compliant practices while reducing administrative burden and audit preparation time.

Start Your Free Trial Today  see how Hour Timesheet ensures your organization stays DCAA-compliant and audit-ready.

Maintaining DCAA compliance is crucial for 8(a) contractors engaged in government contracts, as it ensures adherence to a stringent set of standards and regulations necessary for successful contract execution. Understanding these compliance requirements and implementing effective timekeeping practices are essential for avoiding potential pitfalls and ensuring smooth operations. Hour Timesheet offers an invaluable solution with its DCAA-compliant timekeeping software, specifically designed to support 8(a) contractors in efficiently managing their time tracking and payroll needs while maintaining transparency and auditability.

Understanding DCAA Compliance for 8(a) Contractors

DCAA (Defense Contract Audit Agency) compliance is a critical requirement for government contractors, including those participating in the 8(a) Business Development Program. This program is designed to assist small businesses owned by socially and economically disadvantaged individuals in securing government contracts. For 8(a) contractors, maintaining compliance with DCAA standards is essential not only for retaining eligibility for government contracts but also for ensuring the responsible use of taxpayer funds. The DCAA, operating under the U.S. Department of Defense, provides audit and advisory services to guarantee financial transparency in government contracting. Their audits focus on financial stability and adherence to federal acquisition regulations, which are crucial for contract eligibility Warren Averett.

Compliance requirements for 8(a) contractors include having an accounting system that aligns with DCAA standards, particularly in timekeeping and labor cost allocation. Accurate documentation and categorization of work hours are scrutinized during audits to ensure compliance with these standards Hour Timesheet.

However, maintaining DCAA compliance can be challenging due to the complexity of federal regulations. Common challenges include inaccurate timekeeping and improperly categorized work hours, especially for businesses relying on manual processes Hour Timesheet. Non-compliance can lead to severe consequences, such as financial penalties and loss of contract eligibility, emphasizing the need for robust compliance systems Warren Averett.

For 8(a) contractors, DCAA compliance is a strategic advantage, enhancing competitiveness in securing government contracts. Hour Timesheet offers the necessary tools and support to help contractors meet these standards effectively, mitigating risks and fostering operational efficiency.

The Role of Efficient Timekeeping in Ensuring DCAA Compliance

Efficient timekeeping is a cornerstone of maintaining DCAA compliance for 8(a) contractors. The Defense Contract Audit Agency (DCAA) requires precise documentation to ensure that labor costs are accurately allocated to government contracts. This is crucial for transparency and accountability, preventing fraud and ensuring that taxpayer funds are used appropriately.

Several specific timekeeping requirements are essential for DCAA compliance:

• Total Time Accounting (TTA): Contractors must meticulously record all hours worked by employees, including regular time, overtime, and leave. This level of detail ensures that every hour is accounted for, providing a clear picture of labor costs.
• Differentiation Between Direct and Indirect Labor: It’s vital to distinguish between direct labor (hours chargeable to specific contracts) and indirect labor (supportive hours not directly chargeable). This distinction is critical for accurate billing and compliance.
• Accurate Allocation and Timeliness: Hours worked must be allocated accurately to the appropriate projects, and timesheets submitted promptly, typically within a few days after the end of each pay period.
• Supervisor Approval and Electronic Recordkeeping: Timesheets should be reviewed and approved by supervisors to verify their accuracy. Electronic systems are recommended for enhanced accuracy and audit capabilities.
• Internal Controls and Documentation: Robust internal controls help prevent errors or fraudulent entries. All records must be well-documented, organized, and accessible for audits.

For 8(a) contractors, maintaining a transparent and auditable timekeeping system is crucial. Efficient timekeeping not only prevents compliance issues and supports audit readiness but also enhances operational efficiency. By using modern timekeeping software solutions like Hour Timesheet, contractors can meet these stringent requirements seamlessly, ensuring compliance and gaining a competitive edge in the government contracting space.

How Hour Timesheet Supports 8(a) Contractors in Achieving DCAA Compliance

Hour Timesheet provides an essential solution for 8(a) contractors by offering a DCAA-compliant timekeeping system that meets the stringent requirements necessary for government contracts. This software is designed to streamline compliance processes, ensuring that contractors can maintain transparency and accountability in their operations.

Features Beneficial to 8(a) Contractors

Hour Timesheet offers a range of features specifically beneficial for 8(a) contractors:

• Comprehensive Time Tracking: The software enables precise daily time entry, ensuring all hours, whether direct or indirect, are meticulously recorded. This feature supports maintaining transparency and accountability, which are crucial in government contracting.
• Mobile Capabilities: With its mobile app, Hour Timesheet allows employees to log time from any location, providing flexibility and ensuring compliance even for remote teams. This capability is particularly advantageous for contractors with dispersed teams or those operating across multiple locations.
• Payroll Integration: Seamless integration with payroll systems such as QuickBooks, Gusto, ADP, and Paychex enhances accuracy and reduces administrative burdens. This integration is key for maintaining detailed records and ensuring that payroll processes align with DCAA standards.

Customer Support and Setup Assistance

Hour Timesheet is also committed to providing exceptional customer support, offering setup assistance at no extra cost. This support ensures that 8(a) contractors can seamlessly implement the software and maintain ongoing compliance. The company’s dedication to customer service is underscored by positive user reviews, highlighting the importance of fostering user confidence and satisfaction.

In summary, Hour Timesheet serves as a critical partner for 8(a) contractors in their pursuit of DCAA compliance. By offering a robust suite of features tailored to meet strict government contracting requirements, Hour Timesheet not only simplifies timekeeping processes but also enhances overall efficiency and compliance readiness. This makes it an invaluable asset for contractors looking to secure and maintain government contracts successfully.

Unlocking Compliance and Efficiency with Hour Timesheet

In conclusion, maintaining DCAA compliance is not just a requirement but a strategic advantage for 8(a) contractors seeking to thrive in the competitive landscape of government contracts. Navigating the complexities of federal regulations demands a robust timekeeping system that ensures transparency, accuracy, and accountability. Hour Timesheet, with its DCAA-compliant timekeeping solution, stands as a pivotal tool for contractors aiming to meet these rigorous standards efficiently.

Hour Timesheet’s comprehensive features, including precise time tracking, mobile capabilities, and seamless payroll integration, provide an all-encompassing approach to compliance. Its user-friendly interface and dedicated customer support further simplify the adoption process, allowing contractors to focus on their core operations while ensuring adherence to DCAA requirements. By leveraging Hour Timesheet’s innovative solutions, 8(a) contractors can mitigate risks, optimize their timekeeping practices, and enhance their chances of securing and maintaining profitable government contracts.

As the demand for compliance-ready solutions continues to grow, Hour Timesheet remains committed to empowering contractors with the tools they need to succeed. By choosing Hour Timesheet, 8(a) contractors gain more than just a timekeeping system—they acquire a trusted partner in their journey toward sustained compliance and operational excellence. For more information on how Hour Timesheet can support your compliance efforts, visit Hour Timesheet.

Start your free trial or schedule a demo or Hour Timesheet today!

In September 2022, a major aerospace contractor faced $47.2 million in penalties when DCAA auditors discovered the company had failed to submit required incurred cost submissions for three consecutive years. The contractor’s inadequate year-end preparation and failure to maintain compliant documentation under FAR 52.216-7 resulted in contract suspension just as the new fiscal year began. This case demonstrates why September represents the most critical compliance month for government contractors preparing for fiscal year-end obligations.

Legal Foundation: September’s Regulatory Imperatives

Government contractors face converging compliance deadlines as the federal fiscal year concludes on September 30th. Three regulatory frameworks create mandatory September obligations. First, FAR 52.216-7 requires contractors on cost-reimbursement contracts to submit annual incurred cost submissions within six months of fiscal year-end. Second, CAS 413 mandates adjustment and allocation of pension costs by fiscal year-end. Third, 10 U.S.C. § 3321 requires contractors to certify cost and pricing data accuracy before contract modifications exceeding $2 million.

The confluence of these requirements means September violations trigger cascading penalties. Under FAR 42.709-6, late incurred cost submissions result in automatic interest charges at Treasury rates plus additional penalties. The False Claims Act imposes treble damages for inaccurate cost certifications, with civil penalties reaching $27,018 per false claim under 31 U.S.C. § 3729.

Critical September Deadlines: Where Contractors Stumble

September presents five critical compliance deadlines that consistently trap unprepared contractors. Incurred cost submissions represent the most complex requirement, due March 31st following fiscal year-end but requiring September preparation. A 2023 DCAA analysis revealed that 67% of contractors miss initial submission deadlines due to inadequate timekeeping documentation and poor record maintenance.

Pension cost adjustments under CAS 413 must be calculated and allocated by September 30th. Contractors frequently underestimate the complexity of pension cost calculations, leading to $340 million in questioned costs annually according to Department of Justice enforcement data.

Forward pricing rate agreements (FPRAs) expire on fiscal year-end, requiring contractors to negotiate new rates before October 1st. Failure to establish current rates triggers automatic application of provisional billing rates, often 10-15% below actual costs, creating significant cash flow impacts.

Indirect cost rate proposals must reflect final fiscal year costs and require submission within six months of year-end. Contractors lacking proper cost accounting systems struggle to compile accurate indirect rate calculations, resulting in delayed submissions and interest penalties.

Finally, contract close-out procedures under FAR Part 4 require contractors to submit final invoices and complete administrative actions within prescribed timeframes. Late submissions trigger contracting officer reviews and potential penalty assessments.

Step-by-Step September Compliance Strategy

Step 1: Complete Timekeeping System Audit Conduct comprehensive review of labor accounting systems to ensure compliance with CAS 418 requirements. Verify that all labor hours are properly recorded by cost objective, maintain contemporaneous records, and provide complete audit trails linking timesheets to contract performance. Document any system deficiencies and implement corrective actions before fiscal year-end per FAR 31.201-4.

Step 2: Reconcile Indirect Cost Pools Finalize indirect cost pool allocations ensuring compliance with CAS 402 consistency requirements. Verify that all costs are properly classified as direct or indirect, allocation bases accurately reflect cost relationships, and cost accounting practices remain consistent with prior periods. Identify and segregate unallowable costs per FAR 31.201-6.

Step 3: Prepare Incurred Cost Submission Documentation Compile comprehensive documentation supporting annual incurred cost submissions under FAR 52.216-7. Organize supporting records including payroll registers, vendor invoices, accounting system reports, and indirect cost calculations. Ensure documentation demonstrates cost allowability, allocability, and reasonableness per FAR 31.201-2.

Step 4: Calculate Pension and Benefit Adjustments Complete pension cost calculations and adjustments required under CAS 413. Determine actuarial gains and losses, adjust for actual versus estimated costs, and allocate adjustments to appropriate cost objectives. Maintain detailed supporting documentation for all pension cost determinations and allocation methodologies.

Step 5: Establish Forward Pricing Rates Negotiate forward pricing rate agreements for the upcoming fiscal year based on projected costs and historical performance. Prepare detailed cost estimates supporting proposed indirect rates, escalation factors, and billing rates. Ensure rate structures comply with CAS 410 allocation requirements and maintain consistency with established cost accounting practices.

Financial Impact: September Preparation vs. Penalty Costs

September compliance preparation requires significant investment but generates substantial returns through penalty avoidance. Contractors implementing comprehensive year-end compliance systems typically invest $200,000 to $500,000 in system upgrades, documentation preparation, and professional services during September.

However, non-compliance costs dwarf preparation investments. Late incurred cost submissions trigger automatic interest penalties averaging $150,000 annually for mid-size contractors, based on Treasury rate calculations over submission delays. Inaccurate cost certifications result in average False Claims Act settlements of $12.7 million per contractor, according to Department of Justice data from 2020-2024.

Contract suspension penalties create the most severe financial impacts. Suspended contractors lose an average of $45 million in new contract opportunities annually while remedying compliance deficiencies. When combined with legal defense costs averaging $3.2 million per major compliance case, total non-compliance costs frequently exceed $60 million per violation instance.

The cost-benefit analysis strongly favors September preparation investment. Contractors spending $400,000 annually on comprehensive compliance monitoring reduce their violation risk by approximately 92%, according to DCAA audit result analysis across similar contractor populations.

Multi-Contract Coordination Requirements

September compliance complexity increases exponentially for contractors managing multiple government contracts across different agencies. Each contract may have unique reporting requirements, indirect rate structures, and compliance obligations that must be coordinated to ensure consistent treatment under CAS 402.

Contractors operating under both FAR and agency-specific regulations must satisfy the most restrictive requirements across all contracts. Defense contractors subject to DFARS face additional cybersecurity and supply chain requirements that must be integrated with traditional cost accounting compliance.

The coordination challenge extends to subcontractor management, where prime contractors must ensure consistent accounting treatment across the entire supply chain. Subcontractor incurred cost submissions must align with prime contractor indirect rate proposals and cost allocation methodologies to prevent cascading compliance violations.

Technology Integration: September’s Digital Imperative

Modern compliance requires integrated technology solutions capable of managing complex multi-contract requirements during September’s critical period. Timekeeping systems must interface seamlessly with accounting platforms, project management tools, and regulatory reporting systems to ensure accurate cost capture and allocation.

Cloud-based compliance platforms enable real-time monitoring of cost accumulation, indirect rate calculations, and regulatory deadline tracking. Automated alert systems notify contractors of approaching deadlines and compliance deficiencies before they trigger penalty assessments.

Data analytics capabilities become essential for identifying cost trends, allocation anomalies, and potential compliance risks before they impact year-end submissions. Contractors utilizing integrated technology platforms report 75% faster incurred cost submission preparation and 85% fewer DCAA audit findings related to documentation deficiencies.

Conclusion: September Success Through Strategic Preparation

September represents government contracting’s most critical compliance month, where annual obligations converge with fiscal year-end deadlines. Contractors who treat September as a routine month rather than a strategic compliance period consistently face penalties, suspensions, and market access restrictions that can devastate their federal contracting capabilities.

The regulatory framework underlying September requirements provides no tolerance for late submissions or inaccurate documentation. DCAA auditors intensify their review activities during this period, knowing that year-end pressures often lead to compliance shortcuts and documentation deficiencies.

Successful contractors implement comprehensive September preparation strategies beginning in July, allowing sufficient time to address system deficiencies, compile documentation, and coordinate multi-contract requirements. The choice between proactive compliance investment and reactive penalty management is clear: September preparation costs significantly less than violation consequences while preserving contractor access to the federal marketplace’s $700 billion annual volume.

Prepare for September Deadlines with Hour Timesheet

Hour Timesheet provides the integrated compliance solution your organization needs to meet critical September deadlines. Our platform ensures accurate labor cost capture, maintains year-end documentation requirements, and provides the audit trails government auditors demand during fiscal year-end reviews.

Don’t risk missing crucial September compliance deadlines. Hour Timesheet’s proven system helps contractors maintain compliant practices while streamlining year-end preparation and submission processes.

Start Your Free Trial Today  see how Hour Timesheet ensures your organization stays DCAA-compliant and audit-ready

Ensuring your timekeeping system meets DCAA (Defense Contract Audit Agency) standards is critical for government contractors. Hour Timesheet offers built-in features that support compliance, transparency, and audit readiness. In this guide, we’ll walk through each key feature, where to find it, and how to configure it properly—with screenshots to help you every step of the way.

Daily Time Entry Requirement

Why it matters: DCAA requires employees to enter time daily to ensure accuracy and accountability.

Where to find it:

Go to Settings > Notifications

Toggle on “Remind Employee to enter time”

Toggle on “Remind Employee to submit timesheet.”

 Audit Trail for Edits and Deletions

Why it matters: DCAA auditors look for a clear audit trail showing who made changes, when, and why.

Where to set it:

Navigate to Settings

Navigate to My Timesheet > Timesheet

Check the Timesheet Business Rule Capture reason for any changes made in previous days time

Click the down arrow to expand and view the audit log

Approval Workflow

Why it matters: Supervisory approval of timesheets is a DCAA requirement.

Where to find it:

Go to Groups> Select Supervisor

Assign approvers by Group

Leave Type and Service Item Mapping

Why it matters: Accurate categorization of leave ensures proper billing and cost allocation.

Where to find it:

Go to Accounting> Leave

Create a Leave Type for Each Type of Leave for Your Organization

Assigned Employee Charge Codes

Why it matters: To meet DCAA compliance standards, time entries must be clearly linked to contract-specific charge codes. Each charge code should also be assigned to designated employees to ensure accurate reporting and prevent misallocation.

Where to find it:

Navigate to Accounting> Codes

Assign codes to users and make them visible in the time entry screen

Time Entry Lockout and Period Close

Why it matters: Preventing retroactive changes after approval is essential for audit integrity.

Where to find it:

Go to Export > Export Time

Set rules for locking time entries after approval or payroll export

Timesheet Reports

Why it matters: Auditors may request proof of compliance via a report.

Where to find it:

Navigate to Reports> Printable Timesheet

Final Thoughts

DCAA compliance isn’t just about ticking boxes—it’s about building trust and transparency into your operations. Hour Timesheet makes it easier by embedding compliance into your daily workflows. If you’re unsure whether your setup meets all requirements, reach out to our support team or schedule a compliance review.

Looking for assistance setting up your QuickBooks for DCAA Compliance? Check out or Partners page for a list of Hour Timesheet Referral partners you can trust

In 2019, a defense contractor based in Virginia faced a substantial penalty of $12.3 million. This was a consequence of DCAA auditors uncovering systematic labor mischarging across several cost-plus contracts. The contractor’s inadequate timekeeping system and failure to maintain proper supporting documentation, as required under FAR 31.201-3, led to questioned costs. This ultimately resulted in an 18-month suspension from federal contracting. This case serves as a clear example of the repercussions when contractors underestimate the scope of DCAA and fail to maintain compliant accounting systems.

Legal Foundation: The Regulatory Framework DCAA Enforces

DCAA operates under explicit statutory authority derived from three primary sources. First, 10 U.S.C. § 2313 grants DCAA broad audit authority over defense contractors, including access to records, facilities, and personnel. Second, FAR Part 31 establishes cost principles that govern allowability, allocability, and reasonableness of costs charged to government contracts. Third, the Cost Accounting Standards (CAS) under 48 CFR 9900 series mandate specific accounting practices for covered contracts exceeding $2 million.

The confluence of these authorities means DCAA auditors possess unprecedented access to contractor records. Under FAR 52.215-2, contractors must maintain and provide access to records supporting certified cost or pricing data for three years after final payment. Failure to comply triggers penalties under the False Claims Act, with treble damages plus civil penalties ranging from $13,508 to $27,018 per violation under 31 U.S.C. § 3729.

Common Violation Patterns: Where Contractors Fail

DCAA auditors consistently identify five violation patterns across contractor populations. Labor mischarging represents the most frequent violation, occurring when contractors lack adequate internal controls to ensure accurate time recording per CAS 418. A 2021 DCAA report documented $847 million in questioned costs attributed to inadequate labor accounting systems. DCAA compliance requirements include strict adherence to CAS 418 for time recording. Audit requirements often focus on the robustness of internal controls over labor charging.

Indirect cost pool violations constitute the second most common issue. Contractors frequently fail to maintain consistent treatment of costs between periods, violating CAS 402’s consistency requirements. DCAA has assessed penalties exceeding $200 million annually for inconsistent cost accounting practices. DCAA compliance requirements demand consistent cost accounting treatment, as per CAS 402. Audit requirements will scrutinize consistency in indirect cost pool allocations.

Unallowable cost violations rank third, typically involving entertainment expenses, lobbying costs, or executive compensation exceeding regulatory thresholds under FAR 31.205. The Department of Justice has recovered over $1.2 billion in fiscal year 2023 alone from contractors who improperly charged unallowable costs to government contracts. DCAA compliance requirements prohibit charging unallowable costs specified in FAR 31.205. Audit requirements will involve a thorough review of expenses for unallowable costs.

Defective pricing represents the fourth violation category, triggered when contractors fail to disclose current, complete, and accurate cost or pricing data. The Truth in Negotiations Act (TINA) under 10 U.S.C. § 3706 allows government recovery of excess payments plus interest and penalties. DCAA compliance requirements under TINA mandate transparent and accurate cost or pricing data. Audit requirements will verify the completeness and accuracy of submitted cost and pricing data.

Finally, inadequate accounting system maintenance violations occur when contractors fail to establish systems meeting FAR 16.301-3 requirements for cost-reimbursable contracts. DCAA has disapproved accounting systems for over 300 contractors annually, effectively barring them from receiving new cost-type awards.

Step-by-Step Compliance Requirements

Step 1: Implement Compliant Timekeeping Systems Establish labor accounting systems that satisfy CAS 418 requirements for measuring, assigning, and allocating labor costs. Systems must capture actual hours worked by cost objective, maintain contemporaneous records, and provide audit trails linking timesheet entries to specific contract line items. Documentation must support the relationship between labor costs and contract performance per FAR 31.201-4.

Step 2: Segregate Direct and Indirect Costs Maintain accounting systems that consistently classify costs as either direct or indirect per CAS 402. Direct costs must be specifically identified with particular cost objectives, while indirect costs require allocation through approved base periods. Establish written policies defining cost classification criteria and ensure consistent application across all contracts and accounting periods.

Step 3: Establish Indirect Cost Pool Controls Create formal indirect cost structures that comply with CAS 410 allocation requirements. Pools must contain homogeneous costs with similar beneficial or causal relationships to cost objectives. Maintain supporting documentation for allocation base selection and ensure bases accurately measure cost objective activity levels.

Step 4: Implement Unallowable Cost Identification Develop systematic processes to identify, segregate, and exclude unallowable costs from government billings per FAR 31.201-6. Maintain detailed records of unallowable cost determinations and ensure accounting systems prevent inadvertent charging to government contracts. Establish monthly reviews to identify questionable costs before billing submission.

Step 5: Maintain Adequate Documentation Standards Establish record-keeping systems that satisfy FAR 4.703 retention requirements and provide sufficient detail to support cost incurrence and allocation decisions. Documentation must demonstrate the allowability, allocability, and reasonableness of all costs charged to government contracts. Maintain records for the longer of three years after final contract payment or contract completion.

Cost Analysis: Compliance Investment vs. Penalties

Non-compliance costs significantly exceed prevention investments. DCAA-identified questioned costs averaged $2.1 billion annually over the past five years, representing direct contractor liability before considering False Claims Act penalties, legal fees, and business disruption costs.

A typical mid-size contractor implementing comprehensive compliance systems incurs initial costs of $150,000 to $300,000 for system development, training, and process implementation. Annual maintenance costs range from $75,000 to $150,000 for ongoing compliance monitoring and system updates.

Conversely, major compliance violations trigger average penalties of $8.4 million per contractor, based on Department of Justice settlement data from 2018-2023. When combined with legal defense costs averaging $2.1 million per case and business disruption from contract suspension, total non-compliance costs frequently exceed $15 million per violation instance.

The cost-benefit analysis strongly favors proactive compliance investment. Contractors spending $200,000 annually on compliance systems reduce their violation risk by approximately 85%, according to DCAA audit result analysis across similar contractor populations.

Conclusion: Proactive Compliance as Business Strategy

DCAA compliance represents a fundamental business requirement, not an optional enhancement. The regulatory framework underlying DCAA authority provides auditors with extensive access rights and enforcement mechanisms that can devastate non-compliant contractors. The choice between proactive compliance investment and reactive penalty payment is clear: systematic compliance costs significantly less than violation consequences while preserving contractor access to the federal marketplace.

Contractors who view DCAA compliance requirements as compliance burdens rather than business fundamentals consistently face higher audit frequencies, increased questioned costs, and greater enforcement actions. Conversely, contractors implementing robust compliance systems experience reduced audit scope, faster resolution of findings, and maintained eligibility for new contract opportunities.

The federal contracting market’s $600 billion annual volume makes compliance investment a strategic imperative. Contractors unable or unwilling to maintain systems that meet DCAA compliance requirements forfeit access to this market, while compliant contractors position themselves for sustained growth within the federal sector.

Ready to Implement DCAA-Compliant Timekeeping?

Hour Timesheet provides the complete DCAA-compliant solution your organization needs to meet federal contracting requirements. Our platform ensures accurate labor cost capture, maintains contemporaneous records, and provides the audit trails government auditors require.

Don’t risk costly compliance violations. Hour Timesheet’s proven system helps contractors maintain compliant practices while reducing administrative burden and audit preparation time.

Start Your Free Trial Today  see how Hour Timesheet ensures your organization stays DCAA-compliant and audit-ready.