deltek insight 2011: critical factors for an approved time collection system

ECT-200Critical Factors for an Approved Time Collection System

May, 2011

Presented byDavid Donley

Project Manufacturing

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04/18/20232

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© 2010 Deltek, Inc. - The specifications, functionality and schedules described reflect Deltek’s current estimates, may change without notice, and do not constitute obligations of Deltek.

April 18, 20233 ©2011 Deltek, Inc. All Rights Reserved

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Human Resources

Financial Management

Project Management

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Project Execution & Management

Reporting, GRC & Compliance

Project & Corp Accounting

Time, Expense, Labor, Payroll

Business Performance Management

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Genesis of Requirements on Gov’t Contracts

FAR 31.205-6 - Compensation

FAR 31.203/204 – Direct and Indirect costs

FAR 31.201-4 – Allocability


Other Citations

IGDH 7600.3

- Labor, direct and indirect, can be the most significant cost charged to

Government contracts. Generally, it is the most difficult area to review.

- No third party documentation exists such as invoices, purchase orders, etc., to

support labor costs.

- …control (over) the labor accounting system is (with) the individual employee

and (depends on) the employee’s acceptance of the responsibility to accurately

record time worked.


IDGH 7600.3

Time is the only measure of labor activity

Possible measurement techniques:

Time clocks

Security locks

One task only

Advanced agreement

Manual/automated systems

April 18, 20237

DCAA Audit Manual

©2011 Deltek, Inc. All Rights Reserved

¶6-402

Substantive testing may be greatly reduced when the contractor effectively maintains an adequate and compliant system of internal controls, including monitoring and testing of the system.

In carrying out the primary audit objectives, the auditor should be alert to any condition which raises reasonable suspicion of unlawful or fraudulent activities.


DCAA Audit Manual The extent of audit effort in testing and verifying labor costs will be influenced by: (1) the adequacy and reliability of the contractor's system and related internal

controls,

(2) the nature and significance of labor and related expenses,

(3) prior audit experience with the contractor, (4) the reliability and acceptability of the contractor's labor policies and

procedures,

(5) the audit objectives,

(6) the contractor's mix of contracts & contract provisions, and

(7) the nature of the contractor's organization and operations.

April 18, 20239

Important Distinctions


Cost-driven system – labor typically being the largest cost element

How to collect and convert time to cost, then reconcile to payroll

Since the risk of improper/faulty time charging is high, the government takes

extraordinary measures to mitigate the risk

April 18, 202310

Risk Continuum


Buyer’sRisk

Seller’sRisk

Cost reimbursable

Fixed priced

T&M


DCAA Hall of Shame

Climate – The presumption of contractor guilt is strongest when analyzing labor

FRAUD INDICATORS (IGDH 7600.3)

• Distinctive charging patterns.

• Sudden, significant shifts in charging.

• Decrease in charges to projects/contracts in overrun or near ceilings.

• A disproportionate percentage of employees charging indirect.

• Large number of employees reclassified from direct to indirect or vice versa.

• Same employees constantly reclassified from direct to indirect or vice versa.

April 18, 202312

DCAA Hall of Shame


Weak internal controls over labor charging, such as employee time cards signed in advance, employee time cards filled in by the supervisor, time cards filled in pencil, or time cards filled in at the end of the pay period.

Actual hours and dollars consistently at or near budgeted amounts. Use of adjusting journal entries to shift costs between contracts, IR&D, B&P,

commercial work.

• Significant increases or decreases in charging to sensitive accounts.

• Employee’s time charged differently than associated travel costs.

Small Businesses at a disadvantage?

April 18, 202313

Bulletproof Timekeeping Policy


Paraphrase (or outright plagiarize) the DCAAM Adopt a rigorous timekeeping method Look at automated systems Design and operate an efficient/integrated/reliable labor distribution system Conduct internal audits (quarterly) Train new employees, continuous training Gently overcome the culture shock CAS vs Non-CAS (9903.201–1(b) – Small business exemption)

April 18, 202314

DCAAM 5-902


b. To assess control risk on the labor system as low and reduce substantive testing, the contractor's system should have:

(1) An effective method to monitor the overall integrity of the Labor/Timekeeping System.

(2) An effective employee awareness training program to reasonably assure that all employees are aware of the importance of proper time charging.

(3) Effective procedures for labor authorizations/approvals to facilitate the proper accumulation and recording of labor costs to cost objectives. (FAR 31.201-4)

April 18, 202315

DCAAM 5-902


(4) Effective procedures for timekeeping to reasonably assure that labor hours are accurately recorded and that corrections to timekeeping records are documented, authorized, and approved.

(5) Effective procedures for labor distribution to reasonably assure the proper recording of labor costs to cost objectives.

(6) Effective procedures for labor cost accounting to reasonably assure that labor charges to the Government are in compliance with promulgated Cost Accounting Standards, generally accepted accounting principles, and contract terms/clauses.

April 18, 202316

DCAAM 5-902


(7) Effective procedures for payroll preparation and payment to reasonably assure independent preparation of the payroll, and that pay rates are appropriately authorized and accurate.

(8) Effective procedures for labor transfers and adjustments to reasonably assure that they are documented and approved.

April 18, 202317

Work at Home


Degree of control is the real issue

Lends itself to automated timekeeping

April 18, 202318

Manual vs Automated Timekeeping Systems


Timesheets, design examples

Elements of an acceptable system

Time recorded daily (in ink), record all hours

Time recorded in reasonable increments

Specific process for correcting time

Self-certification by employee

Approval by supervisor

Auditable documentation, traceability of data

April 18, 202319

DCAAM 5-909.2


Procedures for automated Timekeeping Systems should provide for the accurate and current recording of labor hours by authorized employees, as well as appropriate controls to ensure corrections to labor charges are accurate and authorized. Generally, they may be categorized as procedures that pertain to:

a. Only the employee uses their labor charging instrument to access the labor system.

b. Employee badge issuance is sufficiently controlled so that no number is duplicated and badges are not issued to unauthorized persons.

c. Procedures are in place which require the employee to report lost badges promptly.

d. Changes are initialed, authorized, and dated by the employee and supervisor and include a description of the reason for the change. This may be done electronically.

e. A verifiable audit trail process is in place that collects all initial entries and subsequent changes.

April 18, 202320

Uncompensated Overtime


Cost-based accounting principles

Math examples

DCAAM 6-410

- Materiality

- Effective rate method

- Alternate methods


Labor Distribution

Excel

Deltek

Other SW

Integrating timekeeping/payroll services

Accommodate uncomped OT

DCAA bias toward integrated methods

April 18, 202322

Labor Accounting for LLCs


FAR 31.206-5 “Distribution of Profits”

Guaranteed payments

LLC members as W2 employees

If it smells like salary…

Reconcile to K1, members draw

April 18, 202323

Floor Check Audit


Test the strength of internal controls

Typically unannounced (combined with other audits)

Frequency – at least once a year

What they are looking for – pattern charging, lots of changes, errors, contract

start and end dates

Timecards completed in advance, blank cards turned in

Adjusting JE

DCAA sensitivity to indicators of waste, fraud, abuse

April 18, 202324

Floor Check Audit


What to expect, how to manage

Employee alert system (find the CEO first)

Assign someone to escort auditor

Will ask for employee list, select victims at random

Will ask for procedures

Interview employees

Copy of timesheets now, later with reports or bills

April 18, 202325

Floor Check Audit


Interview questions

Title, job description, normal work hours

What are you working on right now?

What, who authorized you to work on this?

Who signs your timecard?

How often do you fill out your timecard?

How do you make corrections?

When do you hand in your timecard?

April 18, 202326

Action Plan


Develop good practices early

Develop a training program

Conduct internal audits

Make compliance a condition of employment

Defend human error, but don’t tolerate bad actors

Provide creative, gentle reminders to employees

April 18, 202327

Parting Thought


Complaint: “It feels like we’re under constant, unwarranted, unreasonable scrutiny.”

Answer: The Gov’ts approach appears reasonable from their perspective. They’re protecting abuse of our tax-paid dollars. Everyone’s at the same competitive disadvantage. Your competitive advantage is being compliant in this particular environment.


Questions?

My accountant tells me

not only will he cook the books

But he’ll eat them too

Should I be worried?


NCMA Ethics Statement

Each member of NCMA shall:

Conduct oneself in such a manner as to bring credit upon the

association, as well as to maintain trust and confidence

in the integrity of the acquisition process.

April 18, 202330

Contact Info


Dave Donley – Operations VP

307-272-4841

[email protected]

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deltek insight 2011: critical factors for an approved time collection system

Education

obligations of deltek

labor accounting system

significance of labor

contractors system

tosupport labor costs

dcaa audit manual

accuratelyrecord time

primary audit objectives