How much was the direct labor cost on that contract again?


In this episode, rather than continuing in the order of the audit program for Pre-Award Accounting Systems, allow me to dive a little bit deeper into the tools that can be used for job costing. More specifically, let’s get into what tools can be used to identify revenues and direct labor costs by contract, and be in compliance with the various Federal Acquisition Regulations (FAR).



·         Record direct labor dollars by contract and produce reports (Putting what I paid my employees into the right buckets and showing it)


Tools needed:

·         Accounting Software

·         Timekeeping System

·         Labor Distribution System


Accounting Software:

Since our focus is to achieve this capability with a good balance between functionality and price, I will use QuickBooks Online (QBO) Plus for this example. One aspect that we love about QBO is that it is relatively inexpensive, and constantly evolving. The recent addition of the “Projects” feature is a good example of how the software continues to get better in response to user demands. The benefits of having a cloud based system, along with the commonly known risks associated with anything on the Internet, also characterize the experience with QBO.

So then, how can we “Record direct labor dollars by contract” using QBO?

The first thing we need to do is tell QBO that we have Government contracts (buckets), for which we want to accumulate costs by. Within QBO, this can be done by using its Customers and Subcustomers feature, or by using Classes.

At the time of this writing, QBO’s Projects feature is rather new and promising; however, yet to be tested by us. So, we will stick with using Customers and Subcustomers for now. Maybe in the near future, we will find the Projects feature to be more efficient and effective. I’ll let you know soon.

The key in identifying Cost Objectives (buckets) for QBO, is to set-up those Government Contracts as “Customers” by first creating a Customer that represents the Government Agency you are working with, and then a Subcustomer that represents the contract that you have with that Government Agency. By doing this, you have basically created a “bucket” for QBO to dump transactions into. You can create as many of these Cost Objectives (Buckets) as necessary.

Nice, we have buckets now.

Okay then, how do I tell QBO how much to put into each bucket?

This is where the timekeeping system and labor distribution system comes into play.


Timekeeping System:

As you know, employees can end up working on multiple contracts. In order to tell QBO how much of an employee’s salary should go into which bucket (or posted under which Subcustomer), we first need to figure out how many hours the employee worked on the different contracts. The tool used to figure this part out is the Timekeeping system. Essentially, we need a Timekeeping system that will;

·         Allow for recording all actual hours worked;

·         Present the contracts (buckets) as a charge code to be selected by the employee;

·         Sync with QBO to transfer over the recorded hours by contract

·         and, meet the requirements in FAR and DFARS; including certification by employee and supervisor, locking mechanism, etc.

As for now, we are finding T-Sheets to be our choice of Timekeeping system. It not only syncs well with QBO, but also offers a version that is designed to meet the government requirements for a timekeeping system. The key in setting up this timekeeping system is to ensure that the Customers and Subcustomers you have set-up in QBO show up as Charge Codes.


Great! So now we have buckets in QBO, and a system that can tell how many of an employee’s hours belong in each bucket. Now we have to tell QBO how many dollars each of those employee hours cost. This is where the Labor Distribution system comes into play.


Labor Distribution System:

The Labor Distribution System is a tool that shows how much an employee got paid, and how many of those dollars went into each bucket (contract). In a nutshell, the Labor Distribution Report (LDR) will;

·         Reconcile to payroll records;

·         Reconcile to timesheet reports;

·         and, reconcile to amounts recorded in each bucket within QBO.

This is achieved by taking the employee’s salary and dividing that by the total number of hours worked during that pay-period to arrive at an effective hourly rate. The labor distribution system then applies that effective rate to the number of hours that the employee charged to each contract (bucket). This results in those hours charged under each bucket to be converted into dollars.


Doing the work:

Cool, so now that I know how much should be charged to each contract, which is setup as a Subcustomer in my QBO, how do I tell QBO to post (dump) that amount under that contract (bucket)?


Posting the above direct labor cost under the right Subcustomer (contract) can be done by using a Journal Entry in QBO. When you run payroll, a Journal Entry should have been made into QBO by the payroll system that dumps all the right costs into the right categories, such as Salary Expense and Payroll Liabilities, etc. The Journal Entry that we enter now is one that essentially breaks the employee’s paycheck into a number of pieces that matches the number of buckets he charged this period, and the amounts as calculated in the Labor Distribution System, and “tagged” by the right contract (Subcustomer). Putting this Journal Entry into QBO, allows for the software to recognize how much of the employee’s salary falls under each contract and produce reports that show that. We recommend doing this task after each pay-period, and no less than at least once a month.


Please do keep in mind that there are other factors to take into consideration when doing job costing, such as; using the above system to record revenues by contract, charging direct vs. indirect hours, moving the right amounts into the right indirect pools, and the normalization of Uncompensated Overtime, etc.

This seems to be a great opportunity to introduce our CFO Augmented Business Service for Government contractors. We call this the CAB Service, which is a monthly subscription fee based service, that includes among other things, doing the above tasks on your behalf!

By subscribing to the CAB Service, you can avoid having to worry about this task at a cost that is lower than that of hiring an in-house bookkeeper.

Also, as is always the case, please feel free to call or email me if you have any questions!

Until then, happy Government contracting!