Six Essential Tips for Avoiding Labor Charging Issues on Government Contracts

In honor of the release of the 6th Edition of the Government Contracts Compliance Handbook, we are sharing six essential tips for government contractors to avoid labor charging issues when working on federal contracts. Labor mischarging is a top area of scrutiny in government contract compliance, as labor costs often make up the largest portion of contract expenditures. Mishandling labor costs can result in False Claims Act liability, financial penalties, contract disputes, and even criminal prosecution. These six tips will help contractors ensure compliance, prevent audit findings, and reduce legal exposure.  

1. Establish a Robust System for Recording and Tracking Labor Costs  

A well-structured labor charging system is the foundation of compliance. Contractors must have a clear, documented process for recording labor costs accurately, ensuring that:   

- Employees charge time to the correct contract and task based on actual work performed.   

- Timekeeping systems are accurate, automated, and tamper-resistant to prevent unauthorized changes.   

- Labor costs are properly allocated between direct and indirect accounts.   

A contractor’s ability to recover costs from the government depends on accurate tracking of labor hours and costs. Cost-reimbursement contracts, price-redeterminable contracts, and progress payment calculations all rely on precise labor cost tracking.  

2. Train Employees and Supervisors on Time Charging Rules  

One of the most common causes of labor mischarging is employee and supervisor misunderstanding of timekeeping requirements. To mitigate this risk:   

- Provide regular training on FAR cost principles, timekeeping requirements, and the consequences of mischarging.   

- Ensure employees understand that charging labor hours inaccurately—even under pressure—is illegal and can result in criminal and civil penalties.   

- Require managers and supervisors to review time charges carefully before approval.   

Training should emphasize that intentional and unintentional labor mischarging can result in personal liability under the False Claims Act. Employees should be encouraged to report potential mischarging concerns through an internal compliance hotline.  

3. Implement Effective Internal Controls and Audits  

Government auditors—including the Defense Contract Audit Agency (DCAA)—routinely scrutinize timekeeping practices. Contractors must implement internal controls to detect and prevent mischarging before an external audit occurs. Best practices include:   

- Regular internal audits of labor charging practices.   

- Floor checks—where compliance personnel visit work areas to verify that employees are working on the projects they are charging time to.   

- Timecard reviews to detect unauthorized changes, suspicious time patterns, or unapproved labor transfers.   

A strong internal audit program can help contractors identify errors before they become costly government audit findings.  

4. Avoid Unauthorized Transfers or Adjustments of Labor Charges  

One of the biggest red flags in government contract labor charging is the reallocation of labor costs from one contract to another—especially when done to avoid exceeding contract ceilings or shifting costs between fixed-price and cost-reimbursement contracts.   

To prevent improper labor transfers:   

- Require written justification and supervisory approval for all labor reassignments.   

- Establish strict policies limiting when and how labor transfers can occur.   

- Prohibit managers from pressuring employees to change time charges to meet budget goals.   

Government auditors often scrutinize sudden increases or decreases in time charges to certain accounts, as well as unexplained shifts of labor hours. Contractors should document the reason for any legitimate adjustments to ensure compliance.  

5. Enforce Timekeeping Discipline for Employees and Managers  

A rigorous timekeeping policy is critical to ensuring compliance. Employees must record their actual time worked daily and without managerial interference. Key policies should include:   

- No pre-filled, altered, or duplicate timecards—Employees must enter time daily and verify its accuracy before submission.   

- Strict controls on supervisor adjustments—Managers should not change time entries unless proper documentation and approval are obtained.   

- Clear disciplinary consequences—Employees and managers who engage in labor mischarging should face disciplinary action, including potential termination.   

Even unintentional timekeeping errors can result in cost disallowances, contract disputes, and fraud allegations. By enforcing discipline in timekeeping procedures, contractors can prevent these risks.  

6. Prepare for Government Audits and Investigations  

Government agencies, including the DCAA and Inspectors General, actively investigate labor mischarging. Contractors should take proactive steps to ensure they are prepared for audits and investigations, including:   

- Keeping detailed documentation of time charges, approvals, and labor cost allocations.   

- Conducting mock audits to identify vulnerabilities before an official government review.   

- Designating a compliance officer or legal counsel to oversee labor charging compliance.   

If an audit or investigation reveals potential labor mischarging, contractors should engage experienced legal counsel immediately to determine the best course of action. Self-disclosure of unintentional errors may mitigate penalties, whereas intentional mischarging can result in severe enforcement actions.   

Complying with labor charging rules under government contracts requires diligence, strong internal controls, and rigorous enforcement of timekeeping policies. By implementing these six essential tips, contractors can avoid legal exposure, financial penalties, and reputational damage while maintaining eligibility for future government work.   

These strategies, derived from the 6th Edition of the Government Contracts Compliance Handbook, reflect our firm’s commitment to helping contractors navigate the complexities of FAR compliance. For tailored legal guidance on labor charging compliance, government audits, or contract disputes, our elite government contracts practice group is ready to assist.