Once a contractor is awarded a contract, it typically sets up budgets for the work to be performed. At first, budgets are very rough estimates of what the contractor believes it will take to perform the task (or sub-task) but as the work progresses, the budgets become more refined.
The funny thing about budgets is the compelling need to manage to those budgets. Managers and teams that don't meet their budgets are sometimes viewed as less than successful. Often times, performance appraisals, bonuses, and promotions are based on the ability to meet budget.
Where there is undue pressure to meet budgets, the risk of labor mischarging increases. At least that's the Government's theory. So, for example, in its audit program for conducting floorchecks at small to medium-sized Government contractors, DCAA (Defense Contract Audit Agency) provides the following guidance:
Determine whether there is a division of responsibility between personnel having a part in the preparation and/or approval of time and attendance records and those responsible for operating within budgets. If a division of responsibility does not exist, the risk increases for affecting payroll in proportion to the number of personnel the employee/manager can influence.So, how does a very small contractor go about creating a division of responsibility between the person responsible for operating within budget and those tasked with approving employee time charges? The short answer is you cannot. Its just like many of the desirable internal controls over accounting - if a company has only one person in its accounting department, there will never be an effective division of duties. The same with timekeeping and budgets. For small companies, there is just not enough people to have an effective division of duties.
So what are the consequences to the contractor? From a contract audit perspective, the risk of labor mischarging increases which means - at least in theory - that the auditors will want to increase their testing in that area. Practically, it means that during employee interviews, the auditors will want to increase the number of employee interviews and perhaps design some analytical tasks to see what happens to labor charging once budgets are met.