BASIC RECORD KEEPING

The types of books and records used in any accounting system are based on what is most suitable for a contractor’s business. The overall objective is to provide cost accounting and financial data that are adequate for government contract costing purposes. The basic record keeping system must provide sufficiently detailed contract costs so that costs can be determined at interim levels for purposes of repricing, negotiating revised targets, and determining billings. Although the use and design of certain specific accounting records may vary from contractor to contractor, the record keeping systems for all government contractors must include a general ledger, a job cost ledger, labor distribution records, time records, subsidiary journals, a chart of accounts, and financial statements.

Several key functions are essential to the adequacy of any basic record keeping system:

1. Segregate direct costs by contract or job and then by cost element (e.g., labor, materials, other direct charges)

2. Segregate indirect costs by account and title (e.g., fringe benefits, labor-related overhead, material-related overhead, service usage, G&A cost)

3. Accumulate costs on both a current and cumulative basis (i.e., year to date and project to date)

4. Establish the accounting period and perform reconciliations of time sheets to labor costs included in job cost ledgers and of basic cost records to the general books of account

5. Enter costs to the books on a current basis

6. Separately identify unallowable costs in the regular books of account (or by way of a less formal cost accounting technique, as long as adequate cost identification is established).

The cost of labor is often the most sensitive cost element. Labor costs impact a con-trac-tor’s cost structure and thus the price paid by the government. Direct and indirect labor costs are generally the single most significant cost element charged to government contracts. In addition, certain areas of labor (e.g., direct labor dollars or hours) are commonly used as the base element for indirect cost rates. Labor costs or hours are also an essential element in a contractor’s estimating system used in providing quantitative and qualitative historical data necessary for determining estimated costs for follow-on government contracts.

Thus, the accurate recording of labor costs by contractor employees is of utmost importance. Unlike other cost items, labor is not supported by third-party documentation such as an invoice, purchase order, or other receipt. The key document in a manual timekeeping system is the timecard prepared by individual employees. Since timecards can be easily altered or controlled by other persons, it is essential that individual employees be made aware of their responsibility and realize the importance of accurate timecard preparation. The government relies heavily on basic internal controls to ensure the propriety of labor costs presented for payment, contract costing, and estimating. It is therefore essential that the internal controls related to labor recording and distribution be firmly established and periodically reviewed by management.

Manual timecards and timesheets should include the following information: employee name, employee identification number, time period, employee signature, daily entries, project name, project number, daily totals, project totals, tax location identification, and a comments section to note changes or other significant matters. Figure 19 presents a sample time report for hourly employees and Figure 20 presents a sample time report for salaried employees.

Electronic timekeeping systems are acceptable, but must have adequate internal controls. For example, only the employee should be authorized to make entries and changes to the timesheet information. Any changes after initial entries have been made must be maintained in the system to provide an audit trail.

Figure 19 TIME REPORT—HOURLY EMPLOYEES XYZ Company

Figure 20 TIME REPORT—SALARIED EMPLOYEES XYZ Company