Labor costs charged to Government contracts represents the single biggest cost element on most contracts. It is the cost element that represents the highest risk to the Government, not only because of its significance but because it is not generally subject to third party verification. Unlike material costs where support includes purchase requisitions, purchase orders, vendor invoices and receiving reports that corroborate the charge, labor is supported only by a time sheet. That is why Government auditors spend so much time and energy performing floorchecks (interviewing employees at their place of work) and that is why auditors spend so much effort in reviewing policies and procedures over timekeeping and testing contractor/employee compliance with those policies and procedures.
Falsifying time cards (to use the old vernacular) is serious business. People have been reprimanded, suspended, fired, fined, and some have even gone to prison for falsifying timecards. Their employers (e.g. Government contractors) have had to pay restitution and fines. Falsification takes many forms. It might be that an employee charges time to one project and works on another. It might mean that the employee charges time for hours not worked. It could be that an employee charges hours to tasks that they are not qualified to perform. Whatever the case, the Government is not getting what it paid, or is paying, for.
Yesterday, for example, the Department of Justice issued a press release announcing that an employee of a Government contractor had plead guilty of filing false time sheets. In this case, the employee, working as a linguist, made false statements concerning the number of hours worked for a NSA (National Security Agency) contractor. Over a two year period, this employee charged 736 hours on his time sheet than he actually worked, resulting in overcharges to the Government, by the time indirect costs were added, of $69 thousand. He now faces a maximum five year prison sentence and a $250 thousand fine in addition to paying restitution (he'll probably be put on probation).
DoJ's press release did not say how the fraud was uncovered. As a linguist working in an NSA facility, he probably did not have a significant amount of management oversight from his employer, a significant internal control weakness in itself. His supervisor was probably signing off on timecards without having first-hand knowledge of his work habits and patterns.
You can read the full DoJ press release here.