This is a particularly important topic! Although it may seem excessive to require salaried employees of SBIR awardees to track project hours, there are valid reasons for this government compliance, which we explain below.
Reason #1. The primary reason time sheets are required by the government is to substantiate labor costs that an SBIR grantee is being reimbursed for. Unlike purchases from a vendor, labor costs don’t come with a receipt or invoice to substantiate the cost, which is where the timesheet, in conjunction with a payroll register and bank statement, are used instead. When it comes time for your audit, you will be required to provide a selection of timesheets for the auditors to review. Your auditors will review the timesheets to ensure that they are signed by the employee and supervisor, that they are being completed timely (at a minimum daily but should be completed throughout the day,) and that a complete workday (8-hours) is being recorded for each day. Any deviation from the auditor’s expectations will result in additional questions and potentially a finding documented in your audit report.
Reason #2. In addition to substantiating costs incurred, time sheets are also required to allocate labor costs for use in total time accounting. Total time accounting is a cornerstone of the Defense Contract Audit Agency (DCAA) compliance and is an allocation methodology that requires every hour worked by an employee to be recorded. This includes uncompensated time, time worked on commercial efforts, as well as direct, indirect, and unallowable time. Using total time accounting ensures that costs are appropriately allocated to the underlying activity to avoid the government subsidizing unrelated business activities.
Case Study: The Risk of Negligent Fraud Without Total Time Accounting
In this case study, an employee worked for 60 hours in a week with 40 hours for direct effort on their SBIR grant and 20 hours of time spent supporting the business’ commercial efforts, which would be considered unallowable for reimbursement. If the company didn’t use total time accounting and instead calculated the amount of direct costs to be reimbursed by the government by simply multiplying the 40 hours worked by the employees’ hourly rate, the government would reimburse the company for the employee’s full salary, which results in the government covering the cost for both the employee’s R&D efforts and the commercial effort. This is obviously not fair for the tax payers to be subsidizing the commercial efforts of a for profit business. Instead, the company must use total time accounting and include all time worked within the allocation methodology, regardless of if an employee is paid or unpaid, which would result in two thirds (40 hours / 60 hours) of the employee’s wages being allocated to direct costs of the grant as reimbursable and one third (20 hours / 60 hours) being allocated as unallowable commercial costs.
Reason #3. Lastly, time sheets provide an important internal control for your company. Time sheets are required to be reviewed and approved by each employee’s supervisor as evidenced by their signature and date. This internal control ensures that there is oversight of the time worked by the employee and supports the time sheet being accurately reported.
Bottom Line
Timesheets and total time accounting are core compliance requirements for SBIR-funded companies. Not only are they necessary to substantiate costs, allocate labor costs, and for internal control purposes, but they are also specifically required by the government, and non-compliance could result in your company being ineligible for future grant funding. At EGC, we implement a DCAA-compliant time-keeping system for all of our clients, along with total time accounting allocation methodologies to ensure our clients pass their Single Audits with flying colors.
