Distributing Labor Costs within QuickBooks

Government Contractors with a QuickBooks® accounting system 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. Indeed, countless small businesses have springboarded their Government Contracting business with this strategy since we introduced this premise back in 2006.

You can organize the chart of accounts into a cost pool structure that segregates direct costs from indirect costs. You can assign direct costs to contracts using the job-cost functionality in QuickBooks. And while QuickBooks does not allocate indirect costs for job costing, indirect costs can be automatically allocated to contracts using ICAT, the indirect cost allocation and reporting tool.

There is one QuickBooks capability necessary for DCAA compliance that is not widely understood. Item 2f on Standard Form 1408 (SF1408) requires the Government Contractor to have “a labor distribution system that charges direct and indirect labor to the appropriate cost objectives.”

To satisfy this requirement, QuickBooks Desktop editions can be used to distribute labor costs based on timekeeping data, whether or not the contractor uses QuickBooks Payroll. We’ll explain how to get started in this article.

Requirements for Labor Distribution

First, what are we trying to achieve for DCAA compliance? A labor distribution system charges direct and indirect labor costs to cost objectives or contracts according to timesheet data. One employee logs 80 direct labor hours in a 2-week cycle on a single contract. Another worked 43 hours on the contract one week, and took 40 hours of PTO the second week. Labor costs for employees performing overhead or general and administrative type functions will accumulate in the appropriate indirect labor account. Each 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 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 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.

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-up contractors 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.

The payroll item is a data field which, in QuickBooks, stands in lieu of identifying the general ledger labor account. In the contractor’s QuickBooks setup, 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 Subject Matter Expert).

To make use of the QuickBooks’ labor distribution capabilities, the contractor must turn on the payroll capabilities of QuickBooks. That will not be an issue if the contractor utilizes a QuickBooks Payroll service. However, a contractor can turn on the QuickBooks payroll capabilities without a subscription to QuickBooks Payroll. By enabling these capabilities, the contractor 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.

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. ICAT provides a detailed Labor Distribution Report that presents an easy-to-follow audit trail, tracing labor charges contained in Contract Cost Reports to payroll records and timesheet source documentation. With QuickBooks and ICAT, a contractor can satisfy the SF1408 requirements and pass a DCAA Accounting System Review.

Discover how to automate Contract Cost Reporting using ICAT with QuickBooks®: