Distributing a Government Contractor's Labor Costs in QuickBooks®

Distribution of labor costs is a critical element of an adequate accounting system, and a concept that is not widely understood. Government Contractors using QuickBooks® have options for distributing labor costs within QuickBooks based on timekeeping data in order to meet this requirement.

For a DCAA compliant accounting system, Item 2f on Standard Form 1408 (SF1408) requires the Government Contractor to have:

Your labor distribution system will be dependent on two main factors:

1. How you execute your timekeeping function
2. How you execute your payroll function

To satisfy the requirement of SF1408 Item 2f, QuickBooks Desktop editions can be configured to distribute labor costs based on time data, whether or not you use QuickBooks' payroll service.

We’ll explain how to get started in this article.

Requirements for Labor Distribution

First, what are we trying to achieve to support DCAA compliance? A labor distribution system accurately documents direct and indirect labor hours and costs by employee, by cost objectives or contracts, and by indirect accounts. Labor distribution records reconcile to payroll and timesheet data, and to job cost and general ledgers.

For example, one employee logs 80 hours in a 2-week cycle on a single contract. All labor hours for this employee, in this pay period, are charged as direct labor on the contract.

Another employee worked 43 hours on the contract one week, and took 40 hours of PTO the second week. The 43 hours of direct labor costs are charged to the contract, while the 40 hours of PTO represent an indirect labor cost. Indirect labor costs for overhead or G&A type activities accumulate in the appropriate indirect labor account in the general ledger.

All labor costs must be charged to the appropriate cost objective.

To satisfy the SF1408 criteria, labor costs must be distributed across multiple general ledger accounts within the QuickBooks accounting system using the payroll function in QuickBooks. An auditor will verify the contractor’s labor distribution records reconcile with timekeeping/payroll records, and reconcile to labor subsidiary and general ledger accounts. A Labor Distribution Report supports this audit trail by showing how labor costs recorded in the timekeeping system for a particular payroll cycle are distributed to cost objectives.

A Labor Distribution Report like the one in ICAT will show the following direct labor charge detail for each contract, and indirect labor charge detail for each indirect account that accumulates labor charges:

• Employee name
• Labor category (for direct labor charges)
• Date of labor charge
• Number of hours charged
• Labor costs charged

This detail may be traced to timesheets and payroll records, and validated vis-a-vis allowability of charges and work authorizations.

Configuring QuickBooks for Labor Distribution

There are two main concepts to understand in order to properly configure QuickBooks to distribute labor costs:

1. Labor costs must be distributed among various general ledger accounts.
   These include direct labor, compensated absence accounts such as holiday time and paid-time-off, overhead labor, G&A labor, and bid & proposal labor.


2. Direct labor costs must be further distributed among final cost objectives.
   Final cost objectives may be contracts or more granular, such as task, contract line item numbers, or units of production.

Time Data

To distribute labor costs in QuickBooks, time data must be captured by a timekeeping system. That time data must be brought into QuickBooks.

Most contractors will capture time data in a web-based timekeeping application, then utilize a data import methodology to automatically populate QuickBooks with employee time data. Smaller start-ups may use the old-fashioned manual data entry method to populate QuickBooks with timekeeping data.

In order for QuickBooks to execute a labor distribution transaction based on time data, at least two, and possibly four, specific data points used for classifying time data must be captured and populated into the QuickBooks timekeeping database. All time data must include the name of the employee, and a payroll item. The third and fourth data points relate to direct labor.

Payroll Items

The payroll item is a data field which, in QuickBooks, stands in lieu of identifying the general ledger labor account. In setting up QuickBooks, payroll items must be created to represent each of the labor accounts to which an employee can charge time, including:

• Direct labor,
• Each of the compensated absence accounts (holiday and PTO at a minimum), and
• Each of the indirect labor accounts (Overhead Labor, G&A Labor, B&P Labor, etc.).

For any time data classified as direct labor in QuickBooks, two additional data points must also be populated:

• Customer/Job (to identify the final cost objective), and
• Service Item (to identify a category of labor such as Project Manager or Engineer).

Enable Labor Distribution

To make use of the QuickBooks labor distribution capabilities, you must turn on the payroll capabilities of QuickBooks. That will not be an issue if you utilize a QuickBooks payroll service – this setting will already be enabled. However, you can also turn on the QuickBooks payroll capabilities without a subscription to QuickBooks Payroll. By enabling these capabilities, you can use these features to automate the distribution of labor costs within QuickBooks.

For more details on setting up the QuickBooks payroll function to distribute labor costs, visit the ICAT Help documentation.

A complete guide to configuring QuickBooks Desktop to satisfy SF1408 criteria, including the options for maintaining a labor distribution, is provided in the on-demand course, Make QuickBooks DCAA Compliant for Government Contracts.

ICAT Supports Labor Distribution

While labor costs can be properly distributed within QuickBooks Desktop, there is no Labor Distribution Report available in the QuickBooks reporting menus. ICAT solves this problem with built-in reports designed for government contracting.

ICAT provides a detailed Labor Distribution Report that presents an easy-to-follow audit trail, tracing labor charges by direct account and final cost objective, and by indirect account, to payroll records and timesheet source documentation.

ICAT also offers a Contract Labor Detail Report so you can focus in on labor charged to a specific job in a specific timeframe. This enables you to drill down on labor hours, categories, and charges by job.

With labor distribution and reporting in place, you can satisfy the Standard Form 1408 – Preaward Survey of Prospective Contractor Accounting System criteria to pass a DCAA Accounting System Review, and thus qualify for cost-reimbursement type contracts. Countless small businesses have springboarded their Government Contracting business with this strategy since we introduced ICAT for QuickBooks back in 2006.

Need help setting up your labor distribution system? Contact us any time.